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•Local data is broadly supportive of a recovery.
• European sentiment, a basket case.
• RBA provides relief to retailers and homeowners.

The data out of Australia this week was broadly supportive of a continued recovery however some leading indicators highlighted a softer economy. Private Sector Credit came out at 2.1, Building Permits were down 14.8% and Private Capital Expenditure at -0.2% were all down on expectations and suggest that growth in the economy may be slowing. Economic data for the week was widely received as hawkish for the local economy with New Home Sales at 6.2% significantly better than expected, Retail Sales at 0.6% for the month of April and Company Gross Operating Profits up 3.9% as the financial, manufacturing and resources sectors performed well. Yesterday’s GDP figure of 2.7% was particularly positive given recent rate hikes and provided strong support for the Australian dollar. GDP growth is still heavily supported by public-sector demand and it’s resilience will be tested as fiscal stimulus dries up.

European sentiment is a basket case and when China said last week that it is a long term investor in Europe it helped in propping up the single currency. Further gains came when Spanish and Italian governments approved austerity measures which provided greater stability in the European debt markets. This week has been a different story for the Euro as weak consumer sentiment, an increased Unemployment rate of 10.1% and asset writedowns at European banks have all seen the single currency weaken.

The decision to keep the overnight cash rate on hold this week was widely anticipated by the market and had little impact on the Australian dollar with the RBA noting that the current policy was “appropriate for the near term”. With some softer economic figures, government demand still leading growth and interest rates at more normal levels the central bank had room to keep the monetary policy unchanged. Inflation is still relatively high which may have given the bank a reason to move however it focussed on the debt crisis in Europe and the resulting impact on global growth forecasts as the reason for not hiking. Asian countries have strong export markets in Europe and the RBA wanted to see how significant the affects will be on global growth, saying that Asian economies have “continued to be quite strong” and that economies in Europe were “relatively weak”. Governor Stevens is satisfied with the readjustment phase from the loose monetary policy we had a year ago noting that rates are “around their average levels of the past decade, which is a significant adjustment from the expansionary setting a year ago”.