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UBS - Cracks appearing in RBA’s ‘trend’ economy

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									ab                                                                                                      Global Economics Research

 UBS Investment Research
 Australian Economic Perspectives

 Cracks appearing in RBA’s ‘trend’ economy?                                                                                   30 March 2012
 When the RBA left the cash rate unchanged in early March, it continued to refer to
 growth as “close to trend overall”. But last week, Stevens sounded a little less sure,
 noting that while a number of factors “had” been leading them to conclude growth                                               Scott Haslem
 was trend, the GDP accounts – released post the March meeting – were suggesting                                                       Economist
 the economy was running “somewhat below trend over 2011”. There continues to                                   
 be ongoing uncertainty about just what is the economy’s current pace.                                                           +61-2-9324 3663
                                                                                                                          George Tharenou
 This week we pull together a handful of the latest very-forward looking indicators                                                   Economist
 which flag the risk that the modest improvement we’ve been highlighting in the                              
 non-mining economy since Q3 last year – post the pause in RBA rate cuts and                                                    +61-2-9324 3520
 commercial bank out-of cycle hikes – may be losing steam. These indicators
 include recent weakness in the weekly consumer confidence and on-line SEEK job
 ads data, a renewed rise in consumer job insecurity, some reversal in the rise in
 consumer confidence about their own family finances, and industry data flagging a
 meaningful correction in new housing loans.

 These handful of indicators have certainly caught our attention, and increase the
 risk the economy may just need a little more 'monetary' help, given a restrictively
 high AUD and contracting fiscal impulse, to ensure it remains ‘mid range’ and on
 an even keel. While any policy change at the upcoming RBA April meeting looks
 very unlikely, whether the RBA feels inclined to provide that ‘help’ in May will
 depend critically on whether the unemployment rate is rising toward 5½% and (not
 'or') underlying inflation print below the 0.625% quarterly pace implied in their
 forecasts. We continue to see the odds of both of these occurring as less than 50%.

 The Week Ahead: The RBA will likely hold, but a more dovish tone may raise speculation                              Data week: 2nd – 6th Apr
 of a rate cut. We expect resi approvals to recover modestly further, with prices flat. Retail
 sales probably grew modestly again. The trade balance will likely rebound to surplus. In                                               Monday
 the US, ISM will be closely watched given softer regionals, while key payrolls should rise                                             PMI (Mar)
 solidly given falling claims. Finally, China’s PMIs will be a focus given the ‘flash’ dropped.                           Building approvals (Feb)
 Chart 1: Despite low unemployment, consumers have become more worried…                                                RBA commodity prices (Mar)

 190                                                                                                10
             Index                                                                              %
                                    Consumer Unemployment expectations (LHS)
 180                                                                                                                            Retail sales (Feb)
                                    Unemployment rate (RHS)                                         9
                                                                                                                      RBA cash rate decision (Apr)

 160                                                                                                                               Wednesday
                                                                                                                                        PSI (Mar)
                                                                                                    7                         Trade balance (Feb)

                                                                                                    6                                 Thursday
                                                                                                                             Tourist arrivals (Feb)
 120                                                                                                5                     Engineering Activity (Q4)
                                                                                                    4                                     Friday
                                                                                                                                         PCI (Mar)
   90                                                                                               3
        96    97     98   99   00   01   02    03   04    05   06    07    08   09   10   11   12

 Source: ABS, Westpac, Melbourne Institute, UBS

 This report has been prepared by UBS Securities Australia Ltd
Australian Economic Perspectives 30 March 2012

Cracks appearing in the RBA’s ‘trend’ economy?
When the RBA left the cash rate unchanged in early March, it continued to refer                                                                                             In early March, the RBA continued to
to Australia’s growth rate as “close to trend overall”, as it had done for                                                                                                  refer to growth as “close to trend
sometime. But last week, Governor Stevens sounded a little less sure, noting that                                                                                           overall”…
while a number of factors “had” been leading them to conclude growth was
trend, the GDP accounts – released post the March RBA meeting – were
suggesting the economy was running “somewhat below trend over 2011”. Even                                                                                                   …more recently the RBA has noted the
as Treasurer Swan this week argued hard that tightening the fiscal accounts                                                                                                 GDP accounts suggest growth was
further to achieve a targeted surplus in 2012/13 was appropriate given an                                                                                                   “somewhat below trend’ over 2011”
economy “returning towards trend growth”, there continues to be ongoing
uncertainty about just what is the current pace of the economy.

We see the RBA as on-hold from here (though clearly with a risk they may trim                                                                                               We see the RBA as on-hold for now as
the cash rate if unemployment rises enough). This reflects their view that the                                                                                              there’s too much on their ‘worry-wall’…
global growth outlook is improving, and growth and inflation are ‘mid range’,
but overlaid (in our view) with a long list of issues sticky-noted to their “worry-
wall”, which are likely to make achieving their inflation target harder in the                                                                                              …enough of a rise in unemployment
period ahead. These include limited capacity for lower unemployment and                                                                                                     could bring them too the ‘rate-cut’ table
higher wage growth, in an environment of rising industrial disputes and poorer
productivity, while domestic inflation is close to 4% and the exchange rate’s
disinflationary impact looks set to fade.
This week we pull together a handful of the latest very-forward looking
                                                                                                                                                                            We pull together a handful of the latest
indicators which flag the risk that the modest improvement we’ve been
                                                                                                                                                                            very-forward looking indicators which
highlighting in the non-mining economy since Q3 last year – post the pause in
                                                                                                                                                                            flag the risk that the improvement
RBA rate cuts and commercial bank out-of cycle moves – may be losing steam.
                                                                                                                                                                            we’ve highlighting in the non-mining
Crack 1 – As shown in Chart 1, consumers’ ‘unemployment expectations’                                                                                                       economy maybe losing steam.
jumped 3½% in March, following a 5% rise in February, to its highest level
since August 2009. This recently rising trend is unusual given an unchanged
unemployment rate over the past 7 months, and raises concern that rising job
insecurity may drag on an already only moderate pace of consumer spending.
Crack 2 – As shown in Chart 2, while recent job hiring indicators have been
rising solidly (signalling no rise in unemployment ahead), our analysis of the
series (due in about 10 days), returning to the negative prints that dominated the
2H11, prior to the strong rises in January & February. This may be early signs of
Chart 2: Weekly SEEK data point to a fall in ANZ job ads…                                                         Chart 3: Roy Morgan flags another fall in consumer confidence
 20                                                                                                         20    135                                                                                                                                            126
         % m/m                                                                                                                   Index                                                                                                                           123
 16                                                                                                         16                                                                                                                                                   120
                           Seek*                                                                                                                                                     Roy-Morgan consumer confidence monthly (LHS)                                117
 12                                                                                                         12
                           ANZ job ads                                                                                                                                               Westpac/M.I. consumer sentiment (RHS)                                       114
  8                                                                                                         8                                                                                                                                                    111
  4                                                                                                         4                                                                                                                                                    105
  0                                                                                                         0     115
 -4                                                                                                         -4
                                                                                                                  110                                                                                                                                            93

 -8                                                                                                         -8                                                                                                                                  Index            90

                                                                 * 4 week moving average, UBS sa
                                                                                                                  105                                                                                                                                            87












-12                                                                                                         -12
      Jun 08   Nov 08   Apr 09     Sep 09   Feb 10   Jul 10   Dec 10    May 11       Oct 11        Mar 12

Source: SEEK, ANZ, UBS                                                                                            Source: Roy Morgan, Datastream, Westpac, Melbourne Institute, UBS

                                                                                                                                                                                                                                                        UBS 2
Australian Economic Perspectives 30 March 2012

a new weaker trend, consistent with the rise in consumers' unemployment
expectations (see Crack 1) and recent company reports. Indeed, analysis of the
recent slowing in jobs growth reveals a broad-based trend, with 7 of 14 sectors
reaching new cycle low (as a y/y %) in February.

Crack 3 – As shown in Chart 3, the latest weekly consumer confidence data
from Roy Morgan flag a 3rd consecutive fall in the Westpac-Melbourne Institute
(WMI) monthly measure of consumer confidence, continuing to unwind recent
gains and threatening to return confidence to the lows of July/August last year.

Crack 4 – Worryingly, the Roy Morgan survey highlights a further decline in
consumers’ happiness about their own financial position in the period ahead. We
have seen a similar drop-back in this question in the WMI survey, with the trend
recovery since September last year key to our call that the consumer – absent a
hawkish RBA, an avalanche of policy in 2011 around the flood, mining and
carbon taxes, better offshore news and less momentum in petrol prices – will be
in a better mood to modestly lift their spending through 2012.

Crack 5 – Industry data for the banks point to a reversal of the improving trend                                                  These handful of softer indicators have
in lending, with loans to owner-occupiers likely down significantly in the next                                                   caught our attention recently,
lending data release (due in a couple of weeks, see Chart 5). A fall of this                                                      increasing the risk the economy may
magnitude would reverse much of the uplift since early 2011 (although the                                                         need a little more 'monetary' help…
improving trend in lending for new construction does appear intact).

These handful of softer indicators have certainly caught our attention over the
past month, and increased the risk that the economy may just need a little more                                                   …whether the RBA feels inclined to
'monetary' help, given a restrictively high AUD and contracting fiscal impulse,                                                   provide that 'help' in May will depend
to ensure it remains ‘mid range’ and on an even keel. While any policy change                                                     critically on whether unemployment is
this coming week at the RBA’s April meeting looks highly unlikely, whether the                                                    rising toward 5½% and (not 'or') the
RBA feels inclined to provide that ‘help’ at its May meeting will depend                                                          underlying inflation prints below the
critically on whether the unemployment rate is rising toward 5½% at the next                                                      0.625% quarterly pace implied in the
print mid April and (not ‘or’) the underlying inflation measures print below the                                                  RBA's forecasts
0.625% quarterly pace implied in the RBA's forecasts. We continue to see the
odds of both of these occurring as being less than 50%, but will be keenly
watching our key leading indicators to try and garner more clarity on just what is
the near-term outlook for the economy, and the risks around that outlook.

Chart 4: Key ‘family-finances’ confidence started to retreat…                                        Chart 5: Industry data point to weaker lending next month
130                                                                                            130   16                                                                                     15
           Index                                                                                              $bn - values             ABS banks owner-occupier (LHS)
125                                                                                                                                    Cannex banks owner-occupier (RHS)
                                                                                               120                                                                                          14
120                                                                                            115

115                                                                                            110                                                                                          13
                                                                                               100                                                                                          12
105                                                                                            95    13
                                                                                               90                                                                                           11
 95                                                                                            80                                                                                           10

 90                                                                                            75
                                                                                               70                                                                                           9
 85                                    Family finances - year ahead (LHS)
                                                                                       Index   65
                                       Consumer confidence (RHS)                                                                                                        $bn - values
 80                                                                                            60    10                                                                                     8
      98     99    00   01   02   03     04     05    06    07    08    09   10   11    12             2007              2008   2009             2010            2011              2012

Source: Westpac, Melbourne Institute, UBS                                                            Source: Cannex, ABS, UBS

                                                                                                                                                                                          UBS 3
Australian Economic Perspectives 30 March 2012

                                            Australian Economic Outlook
                                                     Calendar Years (Year average % change)               Fiscal Years (Year average % change)
                                                  2010         2011       2012 (f)     2013 (f)      2009/10       2010/11 2011/12 (f) 2012/13 (f)
   GDP                                              2.5          2.0          3.2          3.7             2.3         2.0          2.8          3.6
   Non-farm GDP                                     2.6          2.1          2.6          3.6             2.4         1.9          2.7          3.2
   Farm Product                                    -0.8         -0.1         12.8          7.3            -1.2         7.3         -1.5         13.0
   Private Consumption                              2.9          3.4          3.4          3.8             2.5         3.1          3.4          3.7
   Dwelling Investment                              4.1          1.1         -2.0          4.5             1.2         3.0         -2.8          3.1
   Business Investment (underlying)                -1.9         16.3         18.6         12.1            -5.6         5.6         21.9         15.0
   - Equipment                                     -1.1         11.7          9.5          7.0            -3.2         4.2         12.6          7.6
   - Non-residential Construction                  -1.7         25.2         30.5         18.1            -8.1         9.6         36.5         23.4
   Private Final Demand                             2.0          5.6          6.2          5.8             1.0         3.4          6.6          6.1
   Public Final Demand                              8.7         -0.6          0.6          3.2             6.6         3.1         -1.4          2.7
   Stocks (contribution)                            0.4          0.4          0.1          0.1            -0.1         0.5          0.2          0.1
   GNE                                              4.1          4.4          5.0          5.3             2.4         3.8          4.8          5.4
   Exports                                          5.8         -1.6          5.4          7.6             5.3         0.2          3.4          6.2
   Imports                                         14.1         11.6         12.5         13.4             5.6        10.4         13.2         13.6
   Net Exports (contribution)                      -1.5         -2.7         -1.8         -1.8            -0.1        -2.0         -2.2         -2.0

   Housing Commencements (‘000)                    170          147           143          150            167          156          139          150

   Headline CPI                                     2.8          3.4          2.7             2.7         2.3          3.1          2.8          3.0
   RBA ‘underlying CPI’                             2.7          2.5          2.5             2.8         3.1          2.4          2.4          2.7
   Wage Price Index                                 3.3          3.7          3.7             4.0         3.1          3.8          3.6          3.8
   Employment                                       2.7          1.7          0.9             2.2         1.4          2.9          0.6          1.7
   Unemployment Rate (at yr. end)                   5.2          5.2          5.2             4.8         5.3          4.9          5.4          5.0

   Current Account Balance ($billion)             -38.5        -32.0        -60.4        -95.1          -56.2        -33.3        -40.0        -77.5
   - as a % of GDP                                 -2.8         -2.2         -4.0         -6.0           -4.3         -2.4         -2.7         -5.0

   QUARTERLY FORECASTS                           Mar-11      Jun-11       Sep-11       Dec-11       Mar-12 (f)   Jun-12 (f)   Sep-12 (f)   Dec-12 (f)
   GDP                 (q/q)                       -0.3         1.4          0.8          0.4             0.6          1.0          0.9          1.0
                       (y/y)                        1.2         2.0          2.6          2.3             3.3          2.9          3.0          3.6
                                                 Mar-11      Jun-11       Sep-11       Dec-11       Mar-12 (f)   Jun-12 (f)   Sep-12 (f)   Dec-12 (f)
   Headline CPI                (q/q, nsa)           1.6         0.9          0.6          0.0             0.7          1.0          1.4          0.1
                               (y/y, nsa)           3.3         3.6          3.5          3.1             2.2          2.3          3.1          3.1

   RBA statistical core CPI    (q/q, sa)            0.8          0.8          0.4             0.6         0.6          0.6          0.8          0.7
                                (y/y, sa)           2.4          2.7          2.6             2.6         2.4          2.2          2.6          2.7

   RBA ‘underlying’ CPI        (q/q)                0.8          0.8          0.5             0.5         0.6          0.6          0.8          0.7
                                (y/y)               2.3          2.6          2.5             2.6         2.4          2.2          2.5          2.7

   FINANCIAL MARKET FORECASTS (end qtr)          Mar-11      Jun-11       Sep-11       Dec-11       Mar-12 (f)   Jun-12 (f)   Sep-12 (f)   Dec-12 (f)
   - Cash                                          4.75         4.75         4.75         4.25           4.25         4.25         4.25         4.25
   - 90 Day Bills                                  4.92         4.99         4.86         4.50           4.45         4.45         4.45         4.45
   - 3yr Commonwealth Bonds                        5.04         4.76         3.62         3.13           3.50         3.70         4.00         4.20
   - 10yr Commonwealth Bonds                       5.49         5.21         4.22         3.67           4.10         4.20         4.50         4.70
   - ASX 200                                      4838         4608         4009         4057           4400         4500         4600         4700

   Exchange Rates (end qtr): AUD/USD              1.036        1.073        0.974        1.025          1.050        1.000        1.025        1.050
                             AUD/EUR              0.730        0.740        0.726        0.790          0.808        0.800        0.854        0.913
                             AUD/JPY               85.8         86.4         75.1         78.9           84.0         85.0         87.1         89.3
                             TWI                   76.3         77.8         72.4         75.8           76.0         73.1         74.9         77.4
Source: ABS, Datastream, UBS estimates

                                                                                                                                                   UBS 4
Australian Economic Perspectives 30 March 2012

Australian Forecasts: What & Why?
Recent forecast changes                                                     recovery, likely to lead to further sharp declines in stock
   On 9th March, following Q4 GDP, we ‘marked to market’ our                markets and commodity prices, hitting confidence and jobs.
   GDP growth forecasts to 3.2% in 2012 (was 3.3%) and 3.7%                 Consumers ‘repent’ from their new-found caution, driving
   in 2013 (was 3.6%).                                                      spending and drawing down the saving rate. This would likely
     On 6th March, we modestly downgraded our housing starts                see us reverting to a stronger growth profile, raising the risk
     forecast to 143k in 2012 (was 145k) and 150k in 2013 (was              that the RBA hikes earlier than we expected.
     152k).                                                                 China’s slowdown turns out to be sharper than expected (with
     On February 16 , following a surprisingly strong jobs report,          policy slow to respond), undermining commodity prices, the
     we removed our May rate cut forecast and now expect the                AUD, export demand, and potentially threatening some capex
     RBA to be on-hold for the remainder of 2012 (but still with the        plans in the year ahead.
     risk of a rate cut on global uncertainty, a high AUD, or in        Key Growth Signposts
     response to out-of-cycle bank rate hikes).                            Commodity price settlements, particularly given recent sharp
“Bottom Line” on UBS Economic Forecasts                                    falls in iron ore prices. Key to 2012 will be the extent to which
   Should catastrophe be avoided in Europe, we expect the                  prices rebound from here (which we expect they will).
   economy to pick-up to at least trend pace over the coming                Leading indicators that signal ongoing demand for labour,
   year, driven by strong capex and exports (much more so than              providing evidence that a significant rise in the unemployment
   housing and consumers). The key catalysts are the strong                 rate is unlikely.
   business investment outlook and a gradual recovery of the
   global economy. The post-floods reconstruction in Queensland             Credit growth improving as an indicator of consumers and
   should provide an additional boost.                                      business desire to re-lever, and credit bank funding
     Inflation has moderated of late, and business surveys suggest
     further downward pressure in the near term. Underlying                 A sustained pick up in capital goods imports should signal the
     inflation looks to be running at 2½% or a bit below in 2H11.           arrival of the long anticipated capex boom.
     We expect inflation to remain around the mid point of the
                                                                        Positions on Some Key Controversies
     target band in the next few quarters, before drifting up towards
                                                                           Don’t give up on the consumer – Retail trade has been dismal.
     the top of the 2-3% band in late 2012.
                                                                           But strong household cash flow, high savings, elevated
     The 50bp rate cuts in Nov and Dec should provide some                 confidence and a low unemployment rate provide scope for the
     support for interest rate sensitive sectors that have struggled       consumer to regain a trend pace of growth over the coming
     thus far. Falling house prices, poor affordability, and some          year. We nonetheless remain structurally bearish the retail
     negative wealth effects have leaned against both housing and          subsector on a 2-3 year view, given structural shifts to online
     consumer spending. We expect consumption growth to recover            and overseas travel amid a high AUD, and persistently rapid
     modestly through 2012, but not to an ‘above-trend’ rate.              growth in services prices.
     Dwellings investment will probably contract modestly in 2012.          The capex cycle is broader than just mining - While the
     Jobs growth has stagnated after a very strong period in 2H10.          mining sector will do the bulk of investment over the coming
     The current soft jobs market looks likely to persist for a while       couple of years, we expect some broadening out to other
     yet, and we think the unemployment rate will drift up to 5½%           sectors.
     by mid-12. Nonetheless, we expect the jobs outlook to                  Credit growth will pick-up in 2012 - We look for credit growth
     improve, allowing the unemployment rate to drift lower to              to pick-up to a 4-5% y/y system-wide pace in 2012, above its
     5¼% by end-2012.                                                       current 3% pace. Key is the broadening of the capex cycle
     The AUD should remain supported, holding around 1.05                   beyond mining, which should help business credit recover,
     though 2012, thanks in part to the shrinking pool of ‘AAA              while stability of house prices should provide a ‘floor’ to
     stable’ assets, ongoing reserve diversification, and our               housing credit growth.
     expectation for commodity prices to remain relatively strong
     in the next 1-2 years.

Major Growth Risks
   A near term (GFC style) liquidity and funding crisis – the
   ongoing failure of political processes in Europe to calm
   markets appear to be pushing the world closer to an ‘end
   game’. This would have negative impacts on the global

                                                                                                                                       UBS 5
Australian Economic Perspectives 30 March 2012

Market trends                                                                          Chart A: US 10 year bond yield

Monetary policy: RBA – on hold, with risk of a cut                                     9

                                                                                       8                                                                                                                  8
    Cash: Following the recent falls in unemployment we no longer – on balance
                                                                                                                                                                           Fair Value range
    – see further RBA rate cuts, but rather that the easing cycle is most likely at    7                                                                                   US 10yr bond yield             7
                                                                                                                                                                           Fair value
    its end. We expect the RBA to look forward and ‘bank’ near term lower              6                                                                                                                  6
    inflation, unless a renewed jump in the unemployment rate suggest risks to
                                                                                       5                                                                                                                  5
    the outlook (or developments in Europe deteriorate sharply). Of course, we do
    still see a case for the RBA to further ease policy modestly near term to offset   4                                                                                                                  4

    higher bank lending rates (and potential credit rationing) and the tighter         3                                                                                                                  3
    monetary conditions due to a higher AUD. But we are now less convinced the
    RBA agrees.
                                                                                       1                                                                                                                  1
                                                                                           90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Aussie 10yrs - staying expensive…target 4¼% mid 2012
    US 10yrs: The US 10yr yield fell sharply through 2% on US and Euro debt            Chart B: Aussie 10 year bond yield
    crisis worries, and the ‘new’ Fed’s commitment to keep the funds rate near              13                                                                                                       13

    zero until late 2014. Recent US data has been broadly consistent with 2%-3%             12                                                                                                       12
                                                                                                                                                      fair value range
    GDP growth, not a double-dip recession. While Euro risks will keep yields               11                                                                                                       11
                                                                                                                                                      Actual Aussie 10 year bond yield
    near 2%, 10-year treasuries look expensive on a ‘no double dip scenario’, we            10                                                                                                       10
                                                                                                                                                      Fair value
    target 2½% by end-2012 (Chart A).
                                                                                                9                                                                                                    9

    Aussie 10yrs: Aussie 10-year yields (Chart B) have collapsed in line with                   8                                                                                                    8


    their global peers, to around 4%, well below ‘fair value’ at end 2011,                      7                                                                                                    7
    assuming some ongoing fiscal consolidation. Given likely stress around                      6                                                                                                    6
    Europe, we see yields remaining around 4%-4¼% into mid 2012. We target a
                                                                                                5                                                                                                    5
    rise to 4¾% end 2012, as global and domestic growth regains a firmer                                                                                                                         *
                                                                                                4                                                                                                    4
    footing, and credit event risks are less prevalent (while strong offshore
                                                                                                3                                                                                                    3
    demand keeps Aussie bonds well bid).                                                              90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Aussie 3yrs - more expensive…rising over 4% in 2012                                    Chart C: Aussie 3 year bond yield
    Aussie 3 years: Our model suggests 3-years (Chart C) are trading expensive         11                                                                                                            11

    – driven by expectations for RBA rate cuts. Given our expectation that the         10                                                                                                            10

    RBA will at best only cut a further 25bp over coming months (UBSe ‘on                    9
                                                                                                                                                  Fair value range
                                                                                                                                                  Actual Aussie 3 year bond yield
    hold’), we target 3¾% mid 2012, rising to 4¼% end 2012, as growth firms                                                                       Fair value
                                                                                             8                                                                                                       8
    and risk aversion eases.
                                                                                             7                                                                                                       7

Yield Curve - staying around 50bp, before 2H12 bias to flatten                               6                                                                                                       6

    Yield curve: The curve has bull-steepened as rate cut expectations dominate.             5                                                                                                       5

    Looking ahead, we see the curve staying little changed around 50bp over                  4                                                                                                      *4
    coming months, as rate cut expectations and crisis fears remain. For 2H12, we
                                                                                             3                                                                                                       3
    see both short and longer dated yields rising, and the curve flattening toward
                                                                                             2                                                                                                       2
    40, before flattening to 20bp in 2013..                                                           92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Aussie - US 10yr spread returns to over 200bp                                          Chart D: AU-US 10yr Spread
    Aussie-US spread: Fears of a deeper EU crisis – and strong demand from                            800
                                                                                                                                    AU-US 10 year spread - fair value model
    offshore – saw the yield on AUD bonds drop below 4%, sending the spread to                        700

    US treasuries below 200bp. This has reversed as AUD 10yrs have sold off                           600
                                                                                                                                                           Fair value range

    more than US treasuries. We look for the spread to remain above 200bp as                                                                               Actual spread
    Aussie economic growth outperforms US, and RBA remains more hawkish                                                                                    Fair value
                                                                                       basis points

    than the FOMC over the rest of the year.
Source for text and charts: Bloomberg, DataStream, UBS; * UBS forecasts



                                                                                                             86 87 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

                                                                                                                                                                                                UBS 6
Australian Economic Perspectives 30 March 2012

The Week in Review: 26th – 30th March
The RBA FSR said global market sentiment improved noticeably, largely reflecting the ECB
LTRO greatly reducing funding risks for Euro banks, and gradual progress to enhance fiscal
governance and deal with Greece’s sovereign debt problems. Data was generally positive. Job
vacancies bounced modestly, implying jobs growth should be less weak. Credit grew a tick
above than expected, the best since September. New home sales bounced, after plunging.
In the US, Bernanke was cautious on the labour market, citing recent jobs growth may have
reflected ‘catch-up’, though jobless claims are still trending down. Both pending home sales
and CB consumer confidence edged back, but are still trending up. S&P/CS home prices were
flat, after declining. Durables rebounded from early quarter weakness, though March regional
PMIs fell, suggesting slower growth. In Europe, the German ifo held its recent rebound.
In the week to noon, the ASX200 rose 2.2% to a near 8-month high of 4350, the AUD/USD
eased 0.2% to around a 2½ month low of 1.039, while 10 year yields dropped 22bp to 4.08%.

Vacancies imply jobs growth should be less weak                                                                                        RBA Assistant Governor Debelle said that a change in the composition of
 50                                                                                                                             5.0    capital flows may have affected the AUD, but it is hard to judge the impact.
            % y/y                    ABS job vacancies (LHS, adv 2 qtrs)                                             % y/y
                                                                                                                                4.5    The RBA semi-annual Financial Stability Review said “global market
 40                                  Jobs growth (RHS)
                                                                                                                                4.0    sentiment improved noticeably”, largely reflecting the ECB LTRO “greatly
                                                                                                                                3.5    [reducing] funding risks for European banks”, plus “gradual progress” to
                                                                                                                                       enhance “fiscal Governance and dealing with Greece’s sovereign debt
                                                                                                                                       problems”. Also, US data is “more positive, somewhat allaying fears about a
 10                                                                                                                             2.5
                                                                                                                                       global growth slump”. While Euro bank funding pressures “eased”, “spreads
  0                                                                                                                                    are still fairly high” and “ongoing difficulties” and the “subdued” global
                                                                                                                                1.5    outlook pose risks to global financial stability. The RBA found that large bank
                                                                                                                                1.0    profits remain “robust”, with ‘broadly average’ ROE’s. While “slow credit”
-20                                                                                                                                    could constrain future profit growth, it would be “unhelpful” to “chase

-30                                                                                                                             0.0
                                                                                                                                       unrealistic expectations by taking on more risk – through lowering credit
       98       99    00       01        02        03    04      05     06        07    08     09        10    11        12            standards” or expanding too quickly into new markets. The RBA assessed
                                                                                                                                       households as continuing to have “more caution” towards their finances in
New home sales bounced, albeit after plunging                                                                                          recent years, but this improved “resilience” to possible shocks. Meanwhile,
10.0                                                                                                                             17    the RBA said business conditions continue to “vary significantly” by industry.
                                                             HIA newly erected home sales (LHS*)
 9.5                                                                                                                             16    Overall, the RBA gave little guidance on rates, as we expected.
                                                             ABS private residential building approvals (RHS**)
                                                                                                                                       ABS job vacancies bounced by a modest 0.7% q/q in February, only partly
 8.5                                                                                                                                   offsetting a 3.4% drop last quarter. This improved the y/y pace to -4.1%,
 8.0                                                                                                                                   albeit from -6.3% – which was the weakest in a decade. Overall, data still
                                                                                                                                 12    suggest that jobs growth should be less weak than its current pace of broadly
                                                                                                                                 11    flat.
                                                                                                                                       Private credit grew a tick above expected at 0.4% m/m in February – the
                                                                                                                                       fastest since Sep-11 – after a modest 0.2% gain in January. However, the y/y
 6.0                                                                                                                             8
             000s                                   *HIA sample of 100 builders in largest 5 States                                    pace held at 3.5%. The rise was broad-based across housing (0.4% after 0.5%,
                                                                    ** ABS total                                         000s
 5.5                                                                                                                             7
       04            05             06             07           08           09           10             11         12
                                                                                                                                       albeit the y/y held a record low of 5.3%), business (0.4% after -0.2%, 1.2%
                                                                                                                                       y/y), and personal (0.3% after -0.2%, but still -1.1% y/y)
Credit grow ticked up 0.4% (albeit still 3.5% y/y)                                                                                     HIA's sample of newly erected home sales bounced by 3.1% m/m in
21                                                                                                                              2.1
            %                                  Total m/m (RHS)                         Total y/y (LHS)                    %
                                                                                                                                       February, albeit after plunging by 7.3% m/m. This saw a moderation of the
18                                                                                                                              1.8    y/y fall to -18.2%, from -20.1% last month.
15                                                                                                                              1.5

12                                                                                                                              1.2

 9                                                                                                                              0.9

 6                                                                                                                              0.6

 3                                                                                                                              0.3

 0                                                                                                                              0.0

-3                                                                                                                              -0.3
     00         01        02    03            04        05      06      07        08      09        10        11     12

Sources: ABS, RBA, HIA, UBS

                                                                                                                                                                                                                  UBS 7
Australian Economic Perspectives 30 March 2012

The Week Ahead: 2nd – 6th April
In a holiday-shortened week, the RBA (Tue) will likely hold rates for a third meeting, but a
more dovish tone could increase speculation of a rate cut in May (if unemployment rises and
inflation eases). We expect a housing turning point, with residential approvals (Mon, +1.0%)
recovering modestly further, and prices (Mon) flat. Retail sales (Tue, 0.3%) probably grew
modestly again. However, the trade balance (Wed, $1.5bn) will likely rebound into a surplus.
In the US, the ISM (Mon) will be closely watched given softer regionals, and EU and Chinese
PMIs, while the non-manufacturing ISM (Wed) is also out. Key payrolls data (Fri) should
show a solid rise, given falling claims. The FOMC minutes are also due. Elsewhere, Chinese
PMIs (Sun) will be a focus given the ‘flash’ dropped. The ECB (Wed) and BoE (Thu) are
expected to hold rates. Canada’s PMI and labour market are also updated.
Data and Events
      Date               Time (AEDT)                                                          Data/Event                             UBS             Market           Previous
     2/4/6 Apr                9:30                  PMI/PSI/PCI (Mar)                                                                  nf               nf          51.3/46.7/35.6
          2 Apr               11:30                 RPData-Rismark dwelling prices (Mar)                                              0.0%              nf              +0.8%
          2 Apr               11:30                 Residential building approvals (Feb)                                             +1.0%            +0.3%             +0.9%
          2 Apr               16:30                 RBA $A commodity prices (Mar)                                                      nf               nf              -1.3%
          3 Apr               11:30                 Retail sales (Feb)                                                               +0.3%            +0.3%             +0.3%
          3 Apr               14:30                 RBA cash rate decision (Mar)                                                     4.25%            4.25%             4.25%
          4 Apr               11:30                 Trade balance (Feb)                                                             +$1.5bn           +$1.0bn          -$0.7bn
          5 Apr               11:30                 Engineering activity (Q4)                                                          -                 -                -
Source: ABS, Bloomberg, RBA, Reuters, Dow Jones, Mkt is preliminary

Retail sales likely remained sluggish*                                                                 PMI/PSI/PCI (Mar)
 9                                                                                                9    The ‘UBS all-economy PMI’ retraced in February to 45.9 to a 1-
                                                                                                  8    year low. We expect March to bounce, but a weak print would be
 7                                                                                                7
                                                                                                       a negative sign for future growth (and the NAB business survey).
 6                                                                                                6

 5                                                                                                5    Building approvals (Feb)
 4                                                                                                4    Better home builder surveys, lending and sentiment suggest that
 3                                                                                                3    residential building approvals should recover another 1% in
 2                                                                                                2
                                                                                                       February – albeit to a still weak 138k annualised pace. Meanwhile,
 1                                                                                                1
                                                                                                       non-residential will likely plunge after a (hospitals) spike.
 0                                                                                                0

-1                                                                                                -1
                                                                                                       RPData-Rismark dwelling prices (Mar)
-2                                                                                                -2   After capital city dwelling prices fell over 5%, amid support from
     07             08             09               10                   11         12                 RBA rate cuts, February prices showed a modest 0.8% m/m
                                                                                                       recovery. We look for further stability with a flat result in March.
Export rebound to lift trade to a $1.5bn surplus
 4                                                                                                34
          $bn                           Trade balance (LHS)                                            Retail sales (Feb)
 3                                      Imports (RHS)                                             31
                                        Exports (RHS)
                                                                                                       We expect retail sales (values) to continue modest growth in
 2                                                                                                28   February, with another 0.3% m/m gain (though the y/y drops to
                                                                                                       2.2% from 2.7%). Ongoing food price deflation remains a drag.
 1                                                                                                25

 0                                                                                                22   RBA cash rate decision (Apr)
-1                                                                                                19   While the RBA still has a (modest) easing bias – saying at their
                                                                                                       last meeting that rates are appropriate for the moment, we expect
-2                                                                                                16
                                                                                                       them to hold again. However, key will be if there is a more dovish
-3                                                                                                13   tone post Q4’s weaker GDP print, which could open the door to a
                                                                                          $bn          rate cut in May (post jobs and Q1 CPI data).
-4                                                                                                10
     00       01   02    03   04        05     06        07         08    09   10   11   12

Sources: ABS, UBS * February forecasts shows                                                           Trade balance (Feb)
                                                                                                       After January’s trade balance surprisingly hit a $0.7bn deficit, we
                                                                                                       expect a sharp rebound to a $1.5bn surplus in February. The key
                                                                                                       driver is a recovery in ‘bulks’ exports post Chinese New Year, and
                                                                                                       ‘normal’ gold exports which plunged (more than offsetting lower
                                                                                                       export prices) – as well as the already reported drop of imports.

                                                                                                                                                                                     UBS 8
Australian Economic Perspectives 30 March 2012

                          Australian Economic Calendar: March/April
          MONDAY                              TUESDAY                       WEDNESDAY                          THURSDAY                        FRIDAY
      ------- 26 Mar -------              ------- 27 Mar -------           ------- 28 Mar -------            ------- 29 Mar-------        ------- 30 Mar-------
 Act: -0.5%, Pre: +2.0%               Act: 0.0%, Pre: -0.5%         Act: +2.2%, Pre: -3.6% r            Act: +0.7, Pre: -3.4% r      Act: +0.4%, Pre: +0.2%
 GE IFO BUS. CLIMATE (Mar)            US C.B. CONS. CONF. (Mar)     US DURABLES EX-TRANS. (Feb)         US GDP (Q4 ar, 3rd est.)     AU HIA NEW HOME SALES (Feb)
 Act: 109.8, Pre: 109.7 r             Act: 70.2, Pre: 71.6          Act: +1.6%, Pre: -3.0% r            Act: +3.0%, Pre: +3.0%       Act: +3.1%, Pre: -7.3%
 NZ TRADE BALANCE (Feb)                                                                                 UK MORTGAGE APPROVAL (Feb) US PERSONAL INCOME (Feb)
 Act: +$161mn, Pre: -$159mn r                                           RBA FIN. STABILITY REVIEW       Act: 49.0k, Pre: 57.9k r     UBS: +0.3%, Pre: +0.3%
                                                                                                        NZ OWN ACTIVITY O’LOOK (Mar) US CHICAGO PMI (Mar)
        BERNANKE SPEECH                                                                                 Act: 38.8, Pre: net +31.2%   UBS: 62.0, Pre: 64.0
  “A view from the Federal Reserve”                                                                                                  US U. MICH CONS CONF (Mar f)
                                                                                                                                     UBS: 75.5, Pre: 74.3
                                                                                                                                     US PERSONAL SPENDING (Feb)
                                                                                                                                     UBS: +0.6%, Pre: +0.2%
                                                                                                                                     JN CORE CPI (Feb, y/y)
                                                                                                                                     Act: +0.1%, Pre: -0.1%
                                                                                                                                     NZ DWELLING CONSENTS (Feb)
                                                                                                                                     Act: -6.7%, Pre: +8.1% r
                                                                                                                                     NZ HOUSEHOLD CLAIMS (Feb)
                                                                                                                                     Act: +0.1%, Pre: +0.1%
       ------- 2 Apr -------               ------- 3 Apr -------           ------- 4 Apr -------               ------- 5 Apr -------         ------- 6 Apr -------
 UBS: +1.0%, Pre: +0.9%         UBS: +0.3%, Pre: +0.3%                UBS: +$1.5bn, Pre: -$0.7bn        UBS: nf, Pre: +2.1%          UBS: nf, Pre: 35.6
 AU PMI (Mar)                   US FACTORY ORDERS (Feb)               AU PSI (Mar)                      AU ENGINEERING ACTIVITY (Q4) US NON-FARM PAYROLLS (Mar)
 UBS: nf, Pre: 51.3             UBS: +1.8%, Pre: -1.0%                UBS: nf, Pre: 46.7                UK IP (Feb)                  Mkt: +210k, Pre: +227k
 AU RP-R HOUSE PRICE (Mar)      NZ ANZ COMM. PRICE (Mar)              US ISM NON-MFG (Mar)              UBS: +0.1%, Pre: -0.4%       US PRIVATE PAYROLLS (Mar)
 UBS: +0.0%, Pre: +0.8%         UBS: nf, Pre: 0.0%                    Mkt: 56.7, Pre: 57.3              GE IP (Feb)                  Mkt: +223k, Pre: +233k
 AU RBA AUD COMM. PRICE (Mar)                                                                           UBS: -0.2%, Pre: +1.6%       US UNEMPLOYMENT RATE (Mar)
 UBS: nf, Pre: -1.3%                                                         ECB DECISION               CA UNEMPLOYMENT RATE (Mar) Mkt: 8.3%, Pre: 8.3%
 US ISM MANUF. (Mar)                  RBA DECISION (Apr)               UBS & mkt: on-hold, Pre: 1.00%   Mkt: 7.4%, Pre: 7.4%         US AVG. HOURLY EARNING (Mar)
 Mkt: 53.4, Pre: 52.4             UBS & mkt: on-hold, Pre: 4.25%                                        CA EMPLOYMENT (Mar)          Mkt: +0.2%, Pre: +0.1%
 CH OFFICIAL PMI (Mar)               FOMC MINUTES (Mar)                                                 Mkt: +12.5k, Pre: -2.5k      GOOD FRIDAY PUBLIC HOLIDAY
 Mkt: 50.6, Pre: 51.0 (Due 1st)                                                                         CA PMI (Mar)                           Markets closed
 CH HSBC PMI (f, Mar)                                                                                   UBS: nf, Pre: 66.5
 UBS: nf, Pre: 49.6 (Due 1st)                                                                                  BOE DECISION
 JN TANKAN (Q1)                                                                                          UBS & mkt: on-hold, Pre: 0.50%
 UBS: +5, Pre: -4
       ------- 9 Apr -------              ------- 10 Apr -------           ------- 11 Apr -------           ------- 12 Apr -------        ------- 13 Apr -------
 CH CPI (Mar, y/y)                    AU NAB BUS. CONDITIONS (Mar) AU HOUSING FINC. (ex-refi, Feb)      AU EMPLOYMENT (Mar)         US CPI (Mar)
 Pre: +3.2%                           Pre: +3.0                     Pre: -2.9%                          Pre: -15k                   Pre: +0.4%
 CH PPI (Mar, y/y)                    AU NAB BUS. CONFIDENCE (Mar) AU OWNER OCCUPIER NO. (Feb)          AU UNEMPLOYMENT RATE (Mar) US CORE CPI (Mar)
 Pre: 0.0%                            Pre: +0.9                     Pre: -1.2%                          Pre: 5.2%                   Pre: +0.1%
                                      AU ANZ JOB ADS (Mar)          AU CONSUMER CONF. (Apr)             US PPI (Mar)                US UofM CONS. CONF. (Apr)
    EASTER PUBLIC HOLIDAY             Pre: +3.3%                    Pre: -5.0%                          Pre: +0.4%                  Pre: 74.3
         Markets closed               CH TRADE BALANCE (Mar)        US FED BEIGE BOOK                   IN IP (Feb y/y)             CH GDP (Q1, y/y)
                                      Pre: -$31.5bn                 CH NEW YUAN LOANS (Mar)             Pre: +6.8%                  Pre: +8.9%
                                      CH EXPORTS/IMPORTS (Mar, y/y) Pre: 711bn                          NZ PMI (Mar)                CH IP (Mar, y/y)
                                      Pre: +18.4%/+39.6%            NZ EXP’ TRADING ACT. (Q1)           Pre: 57.7                   Pre: +11.4%
                                      NZ QV RESI VALUEMAP (Mar)     UBS: net +20%, Pre: net +13%        NZ ELECT. CARD TRANS. (Mar)
                                      Pre: +2.9% y/y                                                    Pre: -0.3%                            BOK DECISION
                                             BOJ DECISION                                               NZ ANZ-RM CONS. CONF. (Apr)             Pre: 3.25%
                                          UBS: on-hold, Pre: 0-0.1%                                     Pre: 110.2
      ------- 16 Apr -------              ------- 17 Apr -------           ------- 18 Apr -------           ------- 19 Apr -------        ------- 20 Apr -------
 Pre: 1.1%                            Pre: 0.0%                       UK UNEMPLOYMENT RATE (Feb) AU MERCHANDISE IMPORT (Mar) Pre: -1.5%
 US EMPIRE MFG (Apr)                  NZ REINZ HOUSE PRICE (Mar)      Pre: 8.4%                  Pre: -4.5%                  AU GOODS IMPORT PRICE (Q1)
 Pre: 20.2                            Pre: +0.8%                              BOE MINUTES (Apr)  AU NAB BUS. COND/CONF (Q1) Pre: +2.5%
 US HOUSING MKT INDEX (Apr)           GE ZEW (Apr)                                               Pre: +1.7/+1.3
 Pre: 28                              Pre: 37.6                                                  NZ CPI (Q1)
 NZ PSI (Mar)                         US HOUSING STARTS (Mar)                                    UBS: +0.5%, Pre: -0.3%
 Pre: 55.5                            Pre: -1.1%                                                 US PHILLI FED (Apr)
 NZ FOOD PRICES (Apr)                        BOC DECISION                                        Pre: 12.5
 Pre: +0.6%                                     Pre: 1.00%                                       US EXIST HOME SALES (Mar)
                                            RBA MINUTES (Apr)                                    Pre: -0.9%
    UBS: UBS Forecast Pre: Previous Release Act: Actual Mkt: Market a: advanced r: revised p: preliminary f: final Note: Release dates are subject to change

                                                                                                                                                              UBS 9
Australian Economic Perspectives 30 March 2012

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                                                                                                                                      UBS 10
Australian Economic Perspectives 30 March 2012

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the research report.

                                                                                       UBS 11
Australian Economic Perspectives 30 March 2012

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                                                                                                                    UBS 12
Australian Economic Perspectives 30 March 2012

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