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Published on: Thursday, July 13, 2017

This is what it looks like when doves are in charge of interest rates in the world’s largest economy, with Federal Reserve chair Janet Yellen signalling that the Fed won’t rush to tighten monetary policy as inflation remains persistently below target. In Yellen’s regular congressional testimony overnight she emphasised the central bank’s gradual approach to lifting interest rates and unwinding its US$4.5 trillion ($6 trillion) asset portfolio without disrupting stock and bond markets, which have been supported by the crisis-era quantitative easing (QE) programs. Yellen’s comments were taken as implying that the Fed will use its balance sheet rather than Federal Funds rate to normalise monetary policy. Yellen said, “the evolution of the economy will warrant gradual increases in the federal-funds rate over time to achieve and maintain maximum employment and stable prices.” Markets liked it, with the Dow Jones Industrial Average setting its first closing record in nearly a month, and touching an intra-day record of 21,580.79 at one point, while emerging market stocks surged to levels last seen in 2015.

The Eurozone’s bailout vehicle has finally handed over Greece’s long-awaited loan tranche, ensuring that Athens can repay earlier borrowings that mature in coming months. The debt-stricken country received €7.7 billion ($11.5 billion) overnight, the first instalment of a third tranche of financial assistance approved by the European Stability Mechanism (ESM) on Friday. Greece will pay €6.9 billion ($10.3 billion) of that straight out to service debt, while €800 million ($1.2 billion) will go “arrears clearance.” Subject to Greece making “significant progress on arrears clearance” by September 1, Athens will receive a further €800 million ($1.2 billion), bringing the total amount of assistance the nation has received from the ESM to €181.2 billion ($270.4 billion). There were celebrations in Athens, but nothing to do with the bailout: under the Economic Partnership Agreement the EU has signed with Japan, Greece has secured victory in its battle to ensure that feta is sold as a purely Greek product: only feta from Greece will now be sold under that name.

Strong net inflows in the first half of 2017 lifted the Australian exchange traded fund (ETF) industry to a new record of $29.4 billion in funds under management (FUM), according to the BetaShares' Australian ETF Review Half Year 2017. In the six months to June 30, Australian ETFs lifted FUM by $3.6 billion, or 14%, with net new money accounting for $2.8 billion (or 77%) of the industry’s growth, and the rest of the gains coming from net asset value appreciation. Passive index funds captured 74% of the new money, while 20% came from ‘smart beta’ funds, with financial advisers, in particular, driving growth of these funds. Australian equities funds took in the largest amount of flows ($1 billion), while the International equities category followed at $915 million. Fixed income ETFs also continued to receive good flows, with an intake of $400 million during the first half of the year. At a category level, Asian Equities (Broad Asia and Korea) and Geared US Equities were the top performers. In the six months to June, there was no broad category that recorded net outflows. 

The perception that consumers are gloomy and not spending is not accurate, says CommSec, with 706 million purchases made on plastic (credit and debit cards) in May, just short of the record 708 million purchases in December 2016. Those 706 million purchases equate to almost $51 billion in sales. The number of credit and debit card purchases in May was up 16% on the year with the value of purchases up 11%. The Bureau of Statistics (ABS) reported a 0.6% lift in retail sales in May after a solid 1% lift the previous month. But, it appears that the ABS data under-represents the amount of economy-wide spending, failing to pick up increased spending on services like travel and business transactions.

Australian dwelling starts (commencements) fell by 11.4% in the March quarter, the biggest drop in 6 and a half years. House starts fell by 7.7% and apartments fell by 15.1%. Work started on 222,015 new dwellings over the year to March 2017, down 4.9% from the record high of 233,616 dwellings in the year to March 2016. Across the country, starts in the March quarter fell in six states and territories, with the two territories leading the drop: ACT starts were down 65.8%, while the Northern Territory was down by 43.4%. Of the states, New South Wales was down by 17%, Victorian starts declined by 1.9%, Queensland activity fell 10.2%, South Australian commencements were down by 11.1%, while Western Australia and Tasmania actually rose, up by 4.1% and 12.3% respectively. Given the slow start-up of projects, CommSec says the housing cycle looks like staying stronger for longer.

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