Curve Daily Commentary, October 14, 2015

Positive Signs

A sustained lift in Business Conditions is not only boosting Business Confidence but providing some optimism that shows domestic demand is improving.

NAB’s September Business survey was released yesterday and overall the tone was a positive one. Business conditions eased a touch from 11 to 9 but remain well above their post GFC average of 0.3. Confidence also lifted after the previous months fall.

The sustained lift in business conditions is a welcome development with the NAB saying in their release that “Business conditions are holding on to the solid gains obtained over the past year, despite the significant headwinds generated by financial market volatility and the mining sector”. The sustained lift is also telling of the underlying momentum in the domestic economy with the NAB adding that:

Consistently above-average outcomes (since March) suggest that the improved momentum in the non-mining economy is not merely an aberration, but has become much more ingrained – increasingly supported by other partial indicators of the domestic economy. By component, the employment index managed to close some of the gap with trading and profitability, having lagged well behind for much of the past year.

The lift in business conditions is also helping to support Stronger Business Conditions Supporting Confidenceconfidence, something that has been lacking in the post GFC era. According to the NAB “it is not clear to what extent this reflects the change in leadership of the Liberal Party, as solid business conditions and some dissipation of financial market jitters may have also contributed to the result”. The driver is less important than the sustainability of the lift in confidence seen last month. If a higher level of business confidence can be sustained it is likely to precipitate a lift in investment and hiring intentions over the medium term. This is something that will be required to help the economy to bridge the gap left by the decline in mining’s contribution to growth.

David Flanagan – Director Interest Rate Markets