Economic data confirms rate expectations

Further confirmation that Australia can expect a stable interest rate outlook while US rates rise can be found in yesterday’s economic statistics released here and overseas.

In Australia average weekly earnings rose by 0.6% in the three months to May, giving an annual result of 2.8%. Whilst higher than the inflation rate, productivity gains are tempering the flow on effects of higher wages on inflation, allowing the RBA to leave monetary policy on hold at next Tuesday’s Board Meeting.

In the US overnight however, a different story continued to unfold.

Following growth of 4.3% in the March quarter, GDP rose by only 2.3% in the three months to June, in spite of consumer spending rising by 4% in the same period. Net exports and a fall in inventories were the main contributors to the decline.

However on the wages side, the Employment Cost Index rose sharply from 0.4% in the March qtr. to 1.1% in June, the largest jump in eight years. Given Alan Greenspan’s current warnings on inflation, the US markets would have to expect a further tightening, probably as early as August.

The dilemma flows from declining growth on one hand, and increasing costs on the other. That combination does not bode well for business profits, especially with increased borrowing costs flowing from a Fed tightening.