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December quarter 2012

Business conditions weaken to lowest level since June quarter 2009; weakness very apparent in construction, manufacturing and now mining. Forward indicators worsen. Confidence edges lower and very subdued especially in mining. Medium-term expectations poor and capex lower again. Price pressures low, implying soft near-term core inflation.
Business conditions were considerably weaker in the December quarter, deteriorating to their lowest level since June quarter 2009. Official ABS data showed a softening in GDP growth in the September quarter, and more recent activity data including retail sales and international trade point to further slowing in the December quarter. Our survey implies fairly tepid growth in domestic demand and GDP in the final quarter of 2012 (2% and 2% respectively; six-monthly annualised). Forward indicators of nearterm demand weakened notably to very subdued levels, further suggesting that activity will remain soft, in the near term at least. While still reasonably poor, business conditions appear to have held up a little better in the consumer dependent recreation & personal services, retail and wholesale sectors in the quarter, suggesting lower borrowing rates may be providing some support. Perhaps the most interesting development has been the deterioration in mining conditions, where lower commodity prices have crushed the index to sub-GFC levels. Conditions deteriorated in all mainland states except Victoria, where they were unchanged and least subdued (along with WA); conditions were very poor in Queensland. Business confidence edged lower in the quarter and remained lacklustre overall. It appears that recent interest rate reductions have done little to alleviate business worries about the currently soft state of the local economy. Weak indicators of future demand, global concerns, a still high AUD and fiscal consolidation are likely to be weighing on expectations. Business investment intentions (next 12 months) softened to the lowest level since September quarter 2009. This seems broadly consistent with NABs view that mining investment will peak in early 2014. Near and longer term employment expectations weakened further in the quarter and point to a continuing soft labour market. Lack of demand is expected to be the most significant factor impacting profitability over 2013, while concerns about tax & government policy remain important. Product price inflation remained subdued, recording annualised growth of just 0.3%. Retail price inflation was even softer recording only marginal annualised growth in the quarter, and implying a soft Q4 core inflation outcome. Labour and purchase costs growth softened to modestly below-average levels. Implications for NAB forecasts: Little change to latest Global and Australian Forecasts (released 29 January) for activity. While the RBA left policy unchanged in February, we still think it is close to cutting (tentatively March) albeit this will be data dependent. Beyond that, we still see two more cuts later in the year as the labour market weakens. Key quarterly business statistics**
2012q2 Business confidence Business conditions Current Next 3 months Next 12 months Capex plans (next 12) Labour costs Purchase costs Final products prices -4 -2 5 16 17 2012q3 2012q4 Net balance -4 -5 -6 -1 11 10 0.4 0.3 0.1 Trading Profitability Employment Forward orders Stocks Exports Retail prices Capacity utilisation rate 2012q2 1 -6 -1 -2 1 -1 2012q3 2012q4 Net balance -5 -9 -3 -8 -2 -2 0.0 79.4

1 4 17 14 % change 0.6 0.6 0.4 0.5 0.1 0.2

6 0 -1 -3 4 -1 % change 0.0 0.1 Per cent 80.4 80.6

** All data seasonally adjusted, except purchase costs and exports. Fieldwork for this Survey was conducted from 19 November to 7 December 2012, covering over 900 firms across the non-farm business sector.

For more information contact: Alan Oster, Chief Economist (03) 8634 2927 0414 444 652

Next release: 12 February 2013 (January Monthly)

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The trading conditions index declined sharply in the December quarter down 11 to -5 index points more than offsetting a solid pick up in the previous quarter. While trading conditions have moved with volatility over much of 2012, they are currently below the average level over 2011 suggesting sales have generally deteriorated since. Trading conditions deteriorated in all industries in the December quarter, with the worsening most apparent in manufacturing, mining and construction. In contrast, trading conditions weakened only marginally in finance/ business/ property. Conditions were very weak in manufacturing, construction and wholesale, while they were much better (and positive) in recreation & personal services and transport & utilities. Nearterm expected trading conditions (3-month-ahead) and longer term expectations (12-monthahead) continued their downward trend in the quarter. Near-term expected trading conditions weakened sharply in wholesale, mining and property services, while they improved in finance and business services. The forward orders index fell from -3 points in the September quarter to -8 index points in the December quarter its lowest level since June quarter 2009. Consistent with the sharp pull back in current orders, expectations for near-term orders also weakened (down 5 to -3 index points), to be well below the series long-run average (of +7 index points since 1989). Taken together with poor employment conditions and very low levels of capacity utilisation, the overall weakness in forward indicators of demand is consistent with NABs expectation for labour market conditions to soften into the new year.

Trading expectations worsen


Trading conditions (net bal.) 60

Orders outlook very subdued


Non-farm GDP annual growth & forward orders 6 5 40 30 20 10 0 -10 -20 -30 03 04 05 06 07 08 09 10 11 12 13

40
4

20

3 2 1

-20
0

-40 03 04 05 06 07 08 09 10 11 12 13

-1

Trading Nxt 12 months (n.s.a.)

Nxt 3 months Conds 1990s recn

Non-farm GDP growth Orders nxt 3 months (RHS)

Orders (RHS)

By industry, forward orders deteriorated significantly in wholesale, where they were weakest, followed by mining and retail. The only industry to report an improvement in orders (albeit marginal) was transport & utilities, while orders were unchanged in recreation & personal services. Forward orders recorded a negative net balance in all industries in the December quarter (ie. negative net balance), with the weakest outcomes recorded in wholesale, mining and manufacturing. Historically, orders in wholesale have tended to have a leading relationship with retail orders. As such, the particularly sharp deterioration in wholesale orders tends to suggest retailers may see further weakness in orders in coming months. Within retail, orders deteriorated significantly in other retail and motor vehicle retailing, while orders improved modestly in food retailing. The stocks index fell back considerably in the December quarter (down 6 points to -2 index points), more than offsetting a modest rise in the previous quarter. However, three-monthahead expectations improved a touch; this outcome may suggest some expectation for improved sales in the new year. The stocks index fell across all industries in the December quarter, with particularly heavy declines recorded in mining, wholesale and transport & utilities. In levels terms, the stocks index was lowest in construction, transport & utilities and mining, while it was highest (and positive) in manufacturing and retail.

Inventories fall but expected to lift


Stocks (net balance, s.a.) 15 10 5 0 -5 -10 -15 -20 03 04 05 06 07 Stocks 08 09 10 11 12 13

Nxt 3 months

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Employment outlook worsens
Employment: current & expected (net balance) 30

Average hours worked fall back


Change in average hours worked (n.s.a.) 2

20

1
10

0
0

-1
-10

-20

-2

-30 03 04 05 06 07 08 09 10 11 12 13

-3 2007 2008 2009 Quarterly 2010 2011 Annual 2012

Employment Nxt 12 months (n.s.a.)

Nxt 3 months

Employment conditions edged down in the December quarter (down 2 points to -3 index points), marking the fourth consecutive quarterly decline. Interestingly, our survey, along with other indicators of labour market conditions, generally suggests more weakness than that implied by official ABS labour force employment data, which show fairly solid employment growth over the December quarter. Near-term and longer term expectations for employment conditions both deteriorated notably in the quarter. Employment conditions deteriorated very sharply in mining, while they were also moderately weaker in transport & utilities and finance/ business/ property. Employment conditions improved in recreation & personal services and retail, albeit only slightly.

Consistent with a deterioration in employment conditions in the quarter, average hours worked also declined, possibly reflecting a move towards shorter shifts and reduced full time work. The level of average hours worked in the December quarter was lower than the level one year earlier. Changes in average hours worked varied across industries; hours fell most notably in manufacturing and construction, while they rose marginally in retail, transport & utilities, wholesale and property services. In levels terms, average hours worked were highest in mining and construction, while they were lowest in recreation & personal services, finance services and retail.

Sales still the biggest constraint on output


Constraints on current output (% of firms) 80 70 60 50 40 30 20 10 0 03 04 05 06 07 08 09 10 Labour 11 12 80 70 60 50 40 30 20 10 0 03 04 05 06 07 08 09 10 Materials 11 12 Constraints on current output (% of firms)

Sales & orders

Premises & plant

Sales remained the most constraining factor on output in the quarter with almost two-thirds of firms reporting lack of sales and orders as their biggest constraint. Labour too remained fairly constraining, though it was less so than in the previous quarter. Concern about labour constraining output has declined over the past year, in line with the general softening in labour market conditions. Premises & plant and materials were only viewed as fairly minor constraints on output, and remain significantly less constraining than they were in the lead up to the GFC, when utilised capacity was relatively tight. 3

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Labour costs growth fell sharply, to 1.7% (at a quarterly annualised rate) in the December quarter, down from growth of 2.4% in the September quarter. Consistent with an anticipated weakening in employment conditions, expectations for near-term labour costs imply there may be further softening in labour costs growth in the new year. No industries reported an increase in labour cost pressures in the December quarter. The pull back was most apparent in mining and transport & utilities labour costs growth, while retail growth was unchanged. Consistent with a sharp decline in the quarter, labour costs growth was softest in mining, followed by manufacturing, construction and wholesale, while it was strongest (albeit still below the national average) in transport & utilities and recreation & personal services.

Labour cost pressures fall notably, in line with softening employment


Labour costs & compensation of employees (% ann, s.a.) 16 4

12

-4 03 04 05 06 07 08 09 10 11 12 13

-1

Wages & salaries (LHS) Nxt 3 months (RHS)

Current (RHS)

The expected increase in annual average earnings under EBAs rose to 3.0% in the December quarter, up from 2.9% in the September quarter, while the anticipated productivity offset was unchanged at 0.9%, implying a slight rise in overall expected net EBA growth to 2.1%.

Labour costs growth strongest in transport & utilities and recreation; now lowest in mining
Labour costs by industry (per cent) Annualised quarterly growth (s.a.)
8 6 4 2 0 -2 -4 IV I II III IV I 2010 II III IV I II III IV 2011 Mining Constn 2012 Manuf 8 6 4 2 0 -2 -4 IV I II III IV I 2010 II III IV I II III IV 2011 2012 Wsale

8 6 4 2 0 -2 -4 IV I II III IV I II III IV I II III IV 2010 Rec & pers 2011 2012

Retail Trans & util

Fin, prop & bus

Expected net EBA growth highest in transport & utilities; lowest in retail and wholesale
Mining Expected EBA growth 3.1 Productivity offset 1.7 Net EBA growth 1.5 Manuf 3.1 1.0 2.0 Const 3.2 0.3 2.9 Retail 2.4 1.3 1.2 Wsale 2.7 0.6 2.1 Trans 3.7 1.0 2.7 Rec. & Fin. prop. pers. & bus. 2.9 3.2 0.7 0.6 2.2 2.6 Aust. 3.0 0.9 2.1

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Margins weaken and remain tight
Sales margins (net balance) 20 20 20

Retailers in line with national av.


Retail sales margins (net balance) 20

10

10

10

10

-10

-10

-10

-10

-20

-20

-20

-20

-30

-30

-30

-30

-40 03 04 05 06 07 08 09 10 11 12 13

-40

-40 03 04 05 06 07 08 09 10 11 12 13

-40

Margins

Nxt 3 months

Retail margins

Nxt 3 months

The margins index deteriorated in the December quarter (down 5 to -17 points), falling to its lowest level since June quarter 2009. Three-month-ahead expectations also softened, implying margins will remain tight in the first quarter of 2013. The expectation for fairly soft margins in the near term, combined with a general weakening in expectations for labour and purchase costs growth, implies little anticipated improvement in near-term sales and output. The margins index remained negative across all industries for a third consecutive quarter, with particularly weak outcomes recorded for finance services, mining and construction. Retail margins deteriorated modestly in the quarter consistent with a modest weakening in retail conditions and remained subdued overall.

Capacity utilisation still highest in transport albeit declining, lowest in manufacturing and mining
Capacity utilisation by industry (s.a., per cent)
92

92

92

88

88

88

84

84

84

80

80

80

76

76

76

72 IV I II III IV I II III IV I II III IV 2010 2011 2012 Mining Constn

72 IV I II III IV I II III IV I II III IV 2010 Australia Wsale 2011 2012 Retail Transp & util

72 IV I II III IV I II III IV I II III IV 2010 2011 2012 Rec & pers

Australia Manuf

Australia Fin, prop & bus

Capacity utilisation (seasonally adjusted) declined to its lowest level since June quarter 2001 down 1.2 ppts to 79.4% in the December quarter. The decline in utilised capacity largely reflected a very sharp decline in the mining sector. This is consistent with anecdotal evidence that some marginal projects have been deferred or cancelled in response to the recent moderation in commodity prices in particular coal. Nonetheless, while we expect the mining investment boom to plateau in early 2014, the pipeline of Australian resource projects (dominated by mega gas and bulk commodity projects) remains large. Aside from mining, capacity utilisation also declined notably in transport & utilities, finance/ business/ property, manufacturing and retail, while construction was the only industry to report an increase in utilised capacity in the quarter. In levels terms, capacity utilisation was highest in transport & utilities and recreation & personal services consistent with relatively strong conditions in these industries and lowest in manufacturing and mining. 5

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Long-term expected conditions shift down across all mainland states
Business conditions by state: actual & expected (net balance)
40 40 40

20

20

20

-20

-20

-20

-40 2010 2011 2012 2013 Nxt 3 mths

-40 2010 2011 2012 2013 Nxt 3 mths

-40 2010 2011 2012 2013 Nxt 3 mths

NSW Nxt 12 mths (n.s.a.)

VIC Nxt 12 mths (n.s.a.)

QLD Nxt 12 mths (n.s.a.)

Business conditions by state: actual & expected (net balance)


40 40

40

20

20

20

-20

-20

-20

-40 2010 2011 2012 2013 Nxt 3 mths

-40 2010 2011 2012 2013 Nxt 3 mths

-40 2010 2011 2012 2013 Nxt 3 mths

SA Nxt 12 mths (n.s.a.)

WA Nxt 12 mths (n.s.a.)

Australia Nxt 12 mths (n.s.a.)

Business conditions deteriorated across all mainland states in the December quarter, with the exception of Victoria, where they were unchanged at a relatively less subdued level (albeit still negative). There has been a marked convergence in conditions across states over recent years, which is particularly evident when Queensland (-11 points) is removed from the picture; conditions of the remaining states ranged between -6 points (NSW) and -2 points (Victoria and WA). Another notable feature is the poor level of activity across all states, as indicated by negative readings. The December quarter Survey highlights a clear downward shift in business expectations for future activity. Near-term expected conditions (next three months) worsened across all mainland states, with particularly sharp deteriorations recorded for SA, WA, Queensland and NSW. Near-term conditions also deteriorated in Victoria, though only marginally. It is likely that the weakness in forward looking indicators of demand is having an impact on near-term expectations. Expectations for near-term activity are broadly similar across the mainland states, ranging from -2 points in SA and Queensland, to +1 point in WA. Longer term expected business conditions also deteriorated across all mainland states in the December quarter, with particularly heavy declines recorded in the big mining states WA and Queensland which is consistent with a softer outlook for global commodities demand. Nonetheless, expectations are still highest in Queensland, followed by SA, while they are lowest in Victoria. Business conditions in Tasmania improved solidly in the December quarter. While the level of activity in Tasmania implied by the Survey remains poor, conditions have improved considerably over recent quarters, lifting from a recent low of -37 points in September quarter 2011, to the current level of -4 points (on a small sample). Near-term expectations were a little better and longer term expectations were unchanged; expectations in Tasmania, while better, remain at a relatively low level when compared to the mainland states. It is likely that government downsizing will have a particularly big impact on the Tasmanian economy.

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Subscriber details (cont.)


Employment expectations weaken across all states
Employment by state: actual & expected (net balance)
40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths

NSW Nxt 12 mths (n.s.a.)

VIC Nxt 12 mths (n.s.a.)

QLD Nxt 12 mths (n.s.a.)

Employment by state: actual & expected (net balance)


40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 Nxt 3 mths

SA Nxt 12 mths (n.s.a.)

WA Nxt 12 mths (n.s.a.)

Australia Nxt 12 mths (n.s.a.)

Employment conditions deteriorated modestly in WA and NSW in the December quarter, while they were marginally better in Victoria the only state to report an improvement. Employment conditions remain reasonably consistent across the mainland states, with conditions in NSW, Victoria, SA and WA separated by just 1 index point (ranging between -1 and -2 index points), while Queensland was the outlier (-6 index points). Near-term expectations (three months ahead) for employment conditions deteriorated across all of the mainland states in the December quarter. Employment expectations in SA deteriorated particularly sharply, while conditions also weakened considerably in Victoria, Queensland and WA. Expectations held up better in NSW, softening only marginally in the quarter. Near-term expectations were weakest in Victoria and Queensland, while they were least subdued in SA, NSW and WA. Longer term expectations of employment conditions (12 months ahead) deteriorated across all mainland states in the quarter, with particularly heavy declines reported in WA, Victoria and NSW. The broad-based nature of the deterioration in employment conditions suggests that the structural adjustment process that has taken place within the Australian economy in response to the mining boom is expected to continue to weigh on employment conditions over the year ahead as a result of the frictional nature of adjustment (ie. time taken to re-train and re-hire workers). In levels terms, expectations varied across states, with optimism still present in Queensland and, to a lesser degree, SA, while Victoria was quite pessimistic. Employment conditions were little changed in Tasmania, at a very subdued level, while nearterm expectations improved solidly, partly offsetting a significant deterioration in the previous quarter. Longer term expectations were unchanged, remaining very weak overall. 7

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Capex plans soften, particularly in WA
Business confidence, investment and capex plans by state (net balance)
40 30 20 10 0 -10 -20 -30 -40 2009 NSW
60

40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013

40 30 20 10 0 -10 -20 -30 -40 2009 VIC


60

40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013

40 30 20 10 0 -10 -20 -30 -40 2009 QLD


60

40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013

Capex 12m adv 2 qtrs (n.s.a., RHS)


60

Capex 12m adv 2 qtrs (n.s.a., RHS)


60

Capex 12m adv 2 qtrs (n.s.a., RHS)


60

40

40

40

40

40

40

20

20

20

20

20

20

-20

-20

-20

-20

-20

-20

-40 2009

-40 2010 2011 2012 2013

-40 2009

-40 2010 2011 2012 2013

-40 2009

-40 2010 2011 2012 2013

NSW bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

VIC bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

QLD bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

Business confidence, investment and capex plans by state (net balance)


40 30 20 10 0 -10 -20 -30 -40 2009 SA 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013 40 30 20 10 0 -10 -20 -30 -40 2009 WA 40
40 40 30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013

30 20 10 0 -10 -20 -30 -40 2010 2011 2012 2013

30 20 10 0 -10 -20 -30 -40 2009

Australia

Capex 12m adv 2 qtrs (n.s.a., RHS)

Capex 12m adv 2 qtrs (n.s.a., RHS)

Capex 12m adv 2 qtrs (n.s.a., RHS)

60

60

60

60

60

60

40

40

40

40

40

40

20

20

20

20

20

20

-20

-20

-20

-20

-20

-20

-40 2009

-40 2010 2011 2012 2013

-40 2009

-40 2010 2011 2012 2013

-40 2009

-40 2010 2011 2012 2013

SA bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

WA bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

Bus. inv. ann. growth Capex 12m adv 2 qtrs (n.s.a., RHS)

The softened outlook for global commodities demand appears to be having an impact on confidence and capex expectations, particularly in the mining states (Queensland and WA). Business confidence weakened moderately in WA, NSW and SA in the December quarter, while it improved marginally in Queensland and was unchanged in Victoria. In levels terms, confidence was generally poor and not too dissimilar across states. Expectations for capex were not too dissimilar across the mainland states; while they were relatively stronger in WA, expectations did deteriorate fairly noticeably in the quarter implying the softened outlook for global commodities demand is weighing on expectations for further investment. 8

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Finance hardest to obtain in construction; demand for borrowing highest in property, lowest in business and recreation services
Ease of borrowing index (n.s.a., net balance, easier less more difficult)
20 10 0 -10 -20 -30 -40 2009 2010 Australia Manuf 2011 2012 20 10 0 -10 -20 -30 -40 2009 2010 2011 2012 20 10 0 -10 -20 -30 -40 2009 2010 2011 2012 Rec & pers

Mining Constn

Australia Wsale

Retail Transp & util

Australia Fin, prop & bus

Respondents requiring no borrowing (n.s.a., per cent)


70 70 70

60

60

60

50

50

50

40

40

40

30

30

30

20 2009 2010 Australia Manuf 2011 2012

20 2009 2010 2011 2012

20 2009 2010 2011 2012 Rec & pers

Mining Constn

Australia Wsale

Retail Transp & util

Australia Fin, prop & bus

In the December quarter, borrowing became significantly easier to obtain in property services, while it was moderately easier to obtaining in transport & utilities and construction. In contrast, finance was notably more difficult to obtain in manufacturing and finance services. Overall, finance was easiest to obtain in transport & utilities, while it was most difficult in construction, manufacturing and wholesale. Most industries reported a reduction in required borrowing in the December quarter, with the exception of transport & utilities and wholesale, where demand for finance fell modestly. The least borrowing was required in business services and recreation & personal services, while property services, mining, transport & utilities and construction required the most borrowing of all industries.

Macroeconomic, Industry & Markets Research


Australia Alan Oster Jacqui Brand Rob Brooker Alexandra Knight Vacant Dean Pearson Gerard Burg Robert De Iure Brien McDonald Tom Taylor John Sharma Tony Kelly James Glenn Group Chief Economist Personal Assistant Head of Australian Economics & Commodities Economist Australia Economist Agribusiness Head of Industry Analysis Economist Industry Analysis Economist Property Economist Industry Analysis & Risk Metrics Head of International Economics Economist Sovereign Risk Economist International Economist Asia +(61 3) 8634 2927 +(61 3) 8634 2181 +(61 3) 8634 1663 +(61 3) 9208 8035 +(61 3) 8634 3470 +(61 3) 8634 2331 +(61 3) 8634 2788 +(61 3) 8634 4611 +(61 3) 8634 3837 +(61 3) 8634 1883 +(61 3) 8634 4514 +(61 3) 9208 5049 +(61 3) 9208 8129

Global Markets Research - Wholesale Banking Peter Jolly Head of Markets Research Robert Henderson Chief Economist Markets - Australia Spiros Papadopoulos Senior Economist Markets David de Garis Senior Economist Markets New Zealand Tony Alexander Stephen Toplis Craig Ebert Doug Steel London Tom Vosa Vacant Chief Economist BNZ Head of Research, NZ Senior Economist, NZ Markets Economist, NZ Head of Market Economics - Europe Market Economist Europe Foreign Exchange +800 9295 1100 +800 842 3301 +800 64 642 222 +800 747 4615 +1 800 125 602 +(65) 338 0019

+(61 2) 9237 1406 +(61 2) 9237 1836 +(61 3) 8641 0978 +(61 3) 8641 3045 +(64 4)474 6744 +(64 4) 474 6905 +(64 4) 474 6799 +(64 4) 474 6923 +(44 20) 7710 1573 +(44 20) 7710 2910 Fixed Interest/Derivatives +(61 2) 9295 1166 +(61 3) 9277 3321 +800 64 644 464 +(44 20) 7796 4761 +1877 377 5480 +(65) 338 1789

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