Now that we’ve got a better idea as to how these floods are affecting
things and having seen the Q4 CPI, it’s fair to conclude that the RBA won’t
be hiking rates in February, or March either. I don’t think a March rate
hike is a zero probability event though, but taking everything into
consideration, I think it more likely we’ll be seeing a rate hike in
April/May – most likely May with the odds of them waiting till 2H11 very
low in my opinion.
Think of what we know. The fact is, the global economy is growing at a
rapid clip. Indeed the IMF expects growth around 4.75% in both 2010 and
2011. When you consider that the average is around 3.5%, well that’s pretty
strong global growth, 2yrs running I might add. So while we spent much of
last year debating the strength of the globe– in the face of very strong
data – it’s certainly not reasonable to refute its strength now.
This is all important, it sets the stage for everything, because if you’re
a lonesome central bank worried about a once in a generation commodities
boom, and the RBA is, then global growth is kind of critical. Look around
the globe, what does one see? A not so subtle combination of strong growth
and exceptionally loose monetary policy, that’s what. The problem is, this
combination according to theory, history and logic, is inflationary – and,
as we now know, inflation is actually rising.
Naturally there are risks, of course there are. Concerns over sovereign
debt are still rife etc. Yet in the absence of those risks, which lets be
sensible are quite extreme events, what is going to stop the momentum? I
mean what is more likely, the collapse of Europe or China and renewed
global depression (not zero probability events obviously) or a somewhat
less dramatic outcome – ongoing economic recovery. Note that economic
policy around the world, is incredibly accommodative and if you think
austerity is going to change that you’re dead wrong. Austerity barely makes
a dent into the stimulus provided by the world’s major central banks.
Doves in the Australian market are content to overlook this and instead
suggest that as domestic CPI is within the band, that as consumer spending
is weak and that given housing indicators are sluggish, the RBA can afford
to hold rates steady. The picture some of these people try to paint is one
of a sickly economy that is struggling under the unbearable weight of high
interest rates – proved by the weaker run of data lately. For others, the
economy is fundamentally sound, yet consumers are cautious, and inflation
First up, the view that the economy is weak or struggling is just simply
wrong – absolutely far-fetched. For a start, interest rates aren’t
unbearably high. They’re barely restrictive in fact and indeed mortgage
rates are only slightly above average with business rates only a little
higher than that. Don’t forget that in 2007, a time when new home loans
rose by over 1% per month, when building approvals rose slightly more than
that and retail sales were pumping 0.6% per month – mortgage rates were a
good ½% higher. It is implausible that rates are, on an economy wide basis,
providing much of a burden.
I think analysts who adhere to this view are simply confused. Focussing on
one or two data releases (retail sales etc), out of context I might add,
and ignoring more reliable data (the unemployment rate and the national
The 2nd view which I think is more common, is however, just as dangerous.
Granted, some data has been bizarre, and recent CPI prints do support the
idea that there is no urgency in hiking rates. I can appreciate that and,
following the weaker than expected Q4 CPI concede that point.
My worry is that some of the data points used to justify the rates lower
for longer argument, are actually giving misleading signals and I think
there are sound reasons to question them.
I’ve talked at length about the monthly retail survey. I suspect that it is
highly unlikely sales volumes are as weak as suggested by this survey and
the retailers association. They are inconsistent with the national
accounts, with job’s growth even jobs growth in the retail sector which has
been robust. By the way, the AUD expanded by 14% in 2H10 and yet prices in
currency sensitive areas were down much less than that. So there is some
significant margin expansion going on here and margin expansion isn’t a
sign of a weak retailing environment.
As to the CPI data more broadly – well unquestionably, the headline and
core numbers produced by the ABS show inflation moderating. I don’t dispute
this. What I dispute is that this then means true underlying inflation, the
persistent underlying trends driving CPI have changed. As I mentioned on
the day (and some may remember many years ago) inflation in Australia is
skewed. It is largely driven by food (including booze and smokes), housing
(rents, house purchase, and utilities), health and education. Normally
about 80% of the gain over any time period is driven by these components,
noting that they account for around 50% of the basket of goods surveyed.
Throw in fuel, and around 90% of the increase in the CPI over time can be
explained by 55% of the CPI basket. On the downside are things that either
post modest-flat inflation anyways, or even deflation on a consistent
basis. The important thing to note is that the secular forces driving
prices higher remain and it is only the timing of some of quarterly swings
that have given the illusion of moderating inflation. In essence, we’ve
Now the reason these dovish views are dangerous, is because even if they
are accurate, they don’t change, well they shouldn’t change the policy
assessment – the arguments for higher rates.
Think about it. Let’s just assume the doves are correct. Well so what? If
consumers are being cautious it is a voluntary choice. Ok so they are
lifting savings now, but there is no compelling reason to expect this to
continue in the future, with strong employment and incomes. Key point being
it could all turn on a dime . Ditto CPI. Let’s assume it is moderating now
will that be the case in 6-12 months, especially with global growth and
The bottom line for the RBA is whether they can afford to sit around and
wait to see who is right. And that’s where we get down to an assessment of
risks. On which side would they rather err? Leaving rates lower for longer
and then being caught out when retailers discover that spending isn’t that
bad after all, or hiking rates gently again soon, only to find that
consumer saving rates continue to rise, housing remains sluggish and
consumers cautious? Put another way, with interest rates barely above
average are one or two rate hikes in 1H11 going to seriously derail things?
No of course not. But if they leave it too long they risk getting into a
panic later in the year or early next. It’s quite conceivable that we
could wake up in 2H11 with strong retail sales and CPI above the band, a
global economy that is booming amidst exceptionally loose monetary policy
globally and domestic rates only just above average.
Why risk it? It would be completely unnecessary and would risk
destabilising the economy. The path of least regret is for the RBA to
tighten and soon, this makes the most sense, regardless of the current
dataflow. Do it gently now, when the downside is so small, so as to avoid a
panic run later.
The interesting thing to note is that when I look around at the run
forecasts for 2011 and 12 I’m not seeing too many forecasting doom and
gloom – even from the doves. Back in November, before the surprise Q3 GDP
outcome, the RBA was forecasting GDP growth of 3.75%y/y to December 11 and
4%y/y to December 2012. We’ll find out how the RBA has changed that this
Friday when they release the February Statement on Monetary Policy. Me, I’m
still looking for GDP growth 3.75%y/y to December 2011 and some thing like
3.5% in December 2012 – noting that assumes a handful of rate hikes. The
problem is that domestic demand is likely to quite a bit stronger than that
– 4.7% to December 2011 and 4% to December 2012.For the calendar year 2011
I reckon growth will be about 3.2% and 3.6% in 2012. CPI, both headline and
core, will likely be back above the target band by the end of the year.
If the RBA can see sense, then I would think we can expect them to hike
again, perhaps as early as March, but more likely April/May, the key issue
being whether they think it necessary to wait for the CPI. For the reasons
outlined above, I would argue it is not necessary, assessing the relevant
risks, it should manifestly clear what the RBA needs to do.
Well there was no surprise by the Fed’s decision to keep rates unchanged
(between 0-0.25% and for an extended period) nor in its decision to
maintain Qe2 to the June quarter, despite the market view, and fact, that
it has been a failure. Remember that the stated aim was to lower long-end
yields, while in fact they have risen substantially (failure by any
definition). I am surprised that no one on the new Fed committee thought
it wise to dissent, Hoeing was the man last year, unfortunately he is no
longer on the committee but other hawks are on it – yet nothing from them.
Perhaps they were shouted down by the doves though, I mean the press
release mentions the Fed’s ‘statutory mandate’ no less than 4 times.
In terms of the Fed’s economic assessment, nothing has really changed
although they are perhaps slightly more optimistic, noting that ‘growth in
household consumption picked up’. Overall they note that the recovery is
continuing, but as expected, suggest this is insufficient to bring about a
significant improvement in the labour market. As I’ve pointed out before,
this is a blatantly false statement and stands in stark contrast to the
facts – employment is a lagging indicator.
The Fed states that firms are reluctant to add to payrolls, overlooking the
1.3m private sector jobs that were created over the last year. For this
stage of the cycle that is a remarkable outcome. It’s been 5 quarters since
the last negative GDP print, 5 quarters into the recovery. At a similar
stage during the last recession/downturn almost 1m jobs had been lost, not
created. The Fed still doesn’t seem to understand that the high
unemployment rate (now and in the future), resulted from the magnitude of
job losses during the recession. It’s not the speed of the current recovery
that is the problem, this is a robust recovery. It’s just that so many jobs
were lost during the recession. It’s virtually impossible to get the
unemployment rate down any faster. The labour market needs time. On prices,
the Fed noted the increase in commodity pries but said that inflation
expectations remain stable and that underlying inflation has been trending
Price action, noting there was a little volatile in the Treasury and FX
market around the announcement, was reasonable. With about an hour to go,
yields on the major t.notes are higher – 2bp on the 2yr (0.63%), 3bp on the
5yr (1.99%) and 8bp on the 10yr (all from 1630 yesterday). Aussie futures
bounced around on a 4-5 tick range and are currently about 3-4 ticks lower
(3s at 94.85 and 10s at 94.41).
In FX land, AUD is down 34pips (0.9951), Euro is down 11pips (1.3679) and
GBP is up 45pips (1.5876), the relative outperformance there having
something to do with the BoE’s minutes out last night.
While the Fed’s decision may not have shocked, the BoE’s minutes to their
Jan12-13 meeting seems to have caused a bit of a stir (gilts were down
sharply). The reason, is that one more Committee member decided that the
best course of action was to hike rates. So that’s two to hike so far and
others suggested the decision to leaves rates at 0.5% was finely balanced.
Posen (who still wants to print more money) and King were no doubt sitting
there, shaking their heads, and now probably (and incorrectly) point to the
Q4 GDP print (released the previous night) to justify their stance. GDP
fell by 0.5% and that’s got some people spooked, sure. Yet the Stats
office suggests that by itself, the snow storms (Dec) took of 0.5%pts from
growth. Yet low prints around 0-0.3% aren’t unheard of during a robust
recovery. One soft print, following 4 consecutive quarters of solid growth
and with inflation well above target, certainly doesn’t justify a zero
interest rate policy and QE. I can appreciate that the Q4 GDP print,
occurring at such an early stage of the recovery may not justify
restrictive rates – but no one is talking about restrictive rates.
Back to the price action, equities had a reasonable session, quite a solid
one in Europe, with the major indices up 0.9% to 1%. In the US, the S&P500
is currently up 0.6% (1298.1) with basic materials and energy stocks the
main leaders, following a 1.4% spike in copper, a 1.4% bounce in crude
($87.38) and a $7 lift in gold ($1341). Elsewhere, the Dow was 27pts higher
at 12008, the Nasdaq rose 0.9% (2743), while the SPI was 0.7% higher
A few things otherwise. The RBNZ kept rates on hold as expected (3%) and
maintained a predictably dovish stance. They did note that recent
indicators had firmed, but suggested that rates would remain low until
there were more obvious signs of a robust recovery and increase in
underlying inflation. In Germany, import prices rose at their fastest pace
in almost 30yrs (12%y/y to Dec and 2%m/m). Otherwise in the US, new home
sales surged 17% in Dec (well above mkt forecasts of 3.5%), although
mortgage applications fell 13% in the week to January 21 after a 5%
increase the week before.
Looking to the day ahead, we get Westpac’s leading index at 1030 but that’s
pretty much it. Tonight watch out for the EC business climate indicator, US
durable goods, initial jobless claims and pending home sales.
That’s the lot, hope you have a good day…
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CPI was much less than expected, rising 0.4% compared to my and the
market forecast for a rise of 0.7%. Annually, CPI is 2.7% higher.
Excluding fruit and veg and fuel, CPI was flat in the quarter
(2.4%y/y) while the average of the RBA’s cores is 0.4% which again,
was weaker than my and the market forecast for 0.7%/0.8%. Annually,
core inflation is about 2.3y/y.
Non-tradable inflation rose by 0.4% (+3.4%y/y), while tradable rose
by 0.3% to be 1.6%y/y.
Key upside was from fruit and Veg (+15.5%), domestic holidays
(+3.8%), automotive fuel (+2.1%), house purchase costs (+0.7%).
On the downside were pharmaceuticals (–6.2%), deposit and loans
(–1.3%), motor vehicles( -1%), audio, visual (–4.8%) and motor
Well, again we’ve been hit by a surprisingly low CPI print and at face
value, it would imply that rates can stay lower for longer. As the third
quarter low print, the evidence appears to favour the idea that inflation
is not a problem for the Australian economy. The policy implications would
seem clear then and I have to concede that it’s highly unlikely we’ll get a
near-term rate rise (although I view that as a mistake).
The question is why? Why is inflation lower – third quarter in a row.
What’s driving it. Are inflationary pressures truly moderating? The
persistent, underlying pressures? The chart below shows the breakdown by
sector – for both the % change in the quarter and the contribution each
component made to the 0.4% quarter rise in headline inflation.
(Embedded image moved to file: pic17866.gif)
The moderating influences this quarter were from health, household
contents, clothing and financials services (which I find odd given RBA and
commercial bank hikes). Together, these components knocked off about
0.2%pts, which isn’t a lot I guess. The thing is for household contents and
clothing, price falls are not at all unusual. In addition to the currency
benefits (AUD up 9% or the quarter), most of the items in those components
are subject to structural disinflationary forces anyway.
Just note the significant margin expansion underway for the retailers.
There is certainly little evidence that they are passing much of the AUD
rise on – or much evidence of discounting for that matter.
Now the other things to note are that 1) we can’t keep relying on a 9%
increase the AUD each quarter to soften prices. Also consider 2) the fact
that inflation or excess inflation, is generally only driven by a few key
components. In the Australian context, inflation is generally speaking,
driven by food (including booze and smokes), housing (rents, house
purchase, and utilities), health and education. Normally about 80% of the
gain over any time period is driven by these components, noting that they
account for around 50% of the basket of goods surveyed. Throw in fuel,
during times of crude price rises and around 90% of the increase can be
explained by 55% of the CPI basket.
Here’s the thing. I don’t reckon that price trends in any of these
components have really changed. I mean I haven’t seen any evidence of
that. We saw some sign of that this quarter with price increases for food,
housing and fuel. But the series doesn’t show a steady consistent increase
in each quarter usually, the numbers are volatile. Missing this quarter
were coincident increases in the highly seasonal education and health and
utility components. It seems that we’ve just be lucky in reality, that
when utility prices or what have you have surged, we’ve either had soft
food or a drop in fuel prices or some other oddity. But our luck is going
to run out.
Think about what’s happening to health costs, costs of education, food,
fuel etc. The key drivers of CPI. They are going up – I don’t think anyone
would argue against that. Now think of what happens when they start rising
together, as they did from 2006-08. It’s not pretty.
Having said that, I have to concede that headline and core inflation, on
the face of it, are nothing to worry about. But I think my logic and
reasoning is sound and I remain sceptical about any suggestion that
inflation pressure has moderated.
Near-term inflation is not going to provide the smoking gun the RBA needs,
this is clear. My concern though, very real concern, is that the RBA and
market participants consequently become complacent. If I’m right, we will
get an inflation surge at some point soon. All the key drivers of inflation
are rising rapidly, but they are volatile – the timing of some of these
moves have proven very fortuitous and allowed some quite favourable
quarterly outcomes. At this stage I think the RBA is probably alert to this
problem, I guess we’ll find out soon enough if that isn’t the case. But as
things stand now, I seriously doubt the RBA will remain on hold till the
State of the Union 2011: Obama hails ‘Sputnik moment’
US President Barack Obama delivers the State of the Union address (26 Jan 2011) Mr Obama said the US was “poised for progress” after the recession
Continue reading the main story
* Video, comment and analysis
* What do voters want from Obama?
* What is the State of the Union speech?
US President Barack Obama is addressing the US public before both houses of Congress in the annual State of the Union address.
Mr Obama said the US is “poised for progress” after “the worst recession most of us have ever known”.
He said the US is facing a “Sputnik moment” – an opportunity to use international competition to create jobs in science and research.
Republicans have warned that they will reject calls for additional spending.
BBC North America editor Mark Mardell says that, as expected, the president is making a pitch for unity and progress, portraying what is for him a political necessity as a virtue.
But he is also trying to put the depressing wreckage of the recession behind him and conjure a message of aspiration and optimism, our correspondent says.
After making his way through the chamber, greeting members of Congress, Mr Obama began his speech by paying tribute to Gabrielle Giffords, the Congresswoman who was seriously wounded in a mass shooting three weeks ago.
He said the incident had reminded the US public that they “share common hopes and a common creed”.
Following elections in November, both parties now share the responsibility of governing and the people want them to work together, he said.
Mr Obama said technical advances, the rise of nations like India and China and the export of many jobs overseas meant that for many Americans, “the rules have changed”.
He said it was essential to encourage “American innovation” to secure jobs and growth.
Continue reading the main story
image of Mardell’s America Mardell’s America Mark Mardell, BBC North America editor
The Sputnik moment: Obama is talking about investing in education, research and technology to an audience where more than half of them want to hear cut, cut, cut
The US is facing a “Sputnik moment”, he said, referring to the rise in research and education spending which came after the Soviets beat the US into space with the Sputnik satellite in 1957.
“Two years ago, I said that we needed to reach a level of research and development we haven’t seen since the height of the Space Race,” he said.
“In a few weeks, I will be sending a budget to Congress that helps us meet that goal. We’ll invest in biomedical research, information technology, and especially clean energy technology – an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”
Republican lawmakers are expected to criticise the president on his plans for new public spending and investments in education, research and infrastructure.
“A few years ago, reducing spending was important,” Wisconsin Republican Representative Paul Ryan is due to say in the Republican response to Mr Obama. “Today, it’s imperative. Here’s why – we face a crushing burden of debt.”
Mr Obama is also expected to back a plan put forward by Defence Secretary Robert Gates to trim $78bn (£59bn) from the military budget, the Associated Press reported, quoting an anonymous administration official
Mr Obama’s job approval numbers have been on the rise in recent weeks, seen in part as the result of his success in pushing a series of new laws through the so-called lame duck Congress at the end of last year.
Continue reading the main story
We’ll take a look at his recommendations. We always do. But this is not a time to be looking at pumping up government spending in very many areas”
End Quote Mitch McConnell Senate Minority Leader
The State of the Union speech is nationally televised and is historically one of the most watched political events in the US.
The speech comes less than two weeks after a mass shooting in Tucson in the US state of Arizona that injured Ms Giffords and 12 other people and left six people dead.
A seat in Congress was to remain empty in honour of Ms Giffords and family members of some of the victims were to sit with First Lady Michelle Obama.
How to use drug guide sparks outrage
Booklet details ways to snort, inject drugs
Aims to promote drug “harm minimisation”
TAXPAYERS are funding a guide to snorting cocaine and other party drugs under the guise of AIDS prevention.
A four-page booklet, titled Routes of Administration, details ways to protect the nose when snorting powdered drugs using common house and office utensils.
It is published by the former AIDS Council of NSW, now known as ACON, which was set up to promote health and reduce HIV transmission in the gay, lesbian, bisexual and transgender community.
The document includes tips such as: finely chop powdered drugs before inhaling, alternate nostrils and rinse nostrils after snorting.
After warning readers not to mix up their utensils with those of other people, the guide advises: “Using post-it notes with your name on is an easy way to keep track of your own equipment.”
Outrage: Child’s wet t-shirt win
Students paid to inject horse tranquiliser
Herald Sun, 20 Dec 2010
Let’s not lose manger magic this Christmas
Adelaide Now, 18 Dec 2010
Drug lab hidden inside a caravan
Herald Sun, 30 Nov 2010
No time to stop weeding the weed
Herald Sun, 27 Nov 2010
Police uncover drug lab
Herald Sun, 19 Jul 2010
The booklet, which is available at ACON’s offices and via the internet, also has guides to injecting, swallowing and other methods of ingesting drugs.
The only justification for the snorting guide is that Hepatitis C can be passed on from sharing equipment.
ACON receives 75 per cent of its $12 million budget from the State Government through NSW Health, but has been criticised by gay activists for its funding priorities.
Gay activist Gary Burns, most widely known as the man who sued radio broadcaster John Laws for vilification against homosexuals, said the guide was dangerous.
“It is way beyond harm minimisation. It is giving you a step-by-step guide to killing yourself,” Mr Burns said.
“It is important to have harm-minimisation policies to a degree but at the same time, you shouldn’t be spelling out [how to take drugs].”
Mr Burns, along with activists Shayne Chester and Peter Hackney, have called for NSW Health to dissolve the group.
Sydney Lord Mayor Clover Moore has written to Health Minister Carmel Tebbutt conveying the concerns of Mr Burns and seeking an explanation for the booklet.
ACON chief executive Nicholas Parkhill said the guide reproduced information from another booklet originally published by the organisation in December 2005.
He said it had undergone “rigorous” checks by drug and alcohol experts.
“Funding is provided to ACON in recognition that people in ACON’s communities have higher rates of drug use than the mainstream Australian population and that they are at elevated risks of harms as a consequence,” Mr Parkhill said.
“This is not a ‘how to use drugs guide’ but a ‘how to reduce the harms associated with drug use guide’.”
ACON removed the resource from its website last week, only to re-upload it hours later with a message that read: “This information is not intended to encourage the use of illicit substances but to assist people and communities reduce the harms associated with injecting drug use.”
A NSW Health spokesman said the harm reduction strategies in no way condoned drug use.
n US existing home sales soared by
12.3% to annual rate of 5.28 million far
surpassing forecasts for a rise to 4.85
million. US jobless claims fell by 37k
to 404k over the past week. The
Philadelphia Fed Index eased from 20.8 to
19.3 in January. Underlying
sub-components of the index like new
orders and shipments remained healthy.
The Conference Board’s leading index rose
by 1.0% in Dec.
n European shares fell for the
second straight session. Mining stocks
were among the causalities as investors
worried that China will have to undertake
further tightening to combat inflation.
BHP Billiton lost 3.6pct and Rio Tinto
gave back 3.2pct. The FTSEurofirst index
fell by 1.1pct, with the UK FTSE lower by
1.8pct while the German Dax lost 0.8pct.
n US sharemarkets were modestly
weaker on Thursday as investors booked
profits after the recent round of gains.
Sectors that have led the recent rally
were the hardest hit with the S&P
materials index losing 1.7pct and the
Philadelphia semiconductor index losing
1.5pct. Shares in Freeport McMoran Copper
and Gold lost almost 4pct after it cut
its sales forecast and said costs would
rise. With an hour of trade, the Dow
Jones index was down almost 7pts or
0.1pct with the S&P 500 down 0.1pct and
the Nasdaq was lower by 17pts or 0.6pct.
n US treasuries fell on Thursday
(yields higher) following a weak bond
auction. The $13 billion sale of 10yr
TIPS was met with lacklustre demand. US
2yr yields rose 5pts to 0.63pct and US
10yr yields rose 10pts to 3.45pct.
n The US dollar rallied against
major currencies in overnight trade
following the better than expected US
economic data. The Euro hit early highs
near US$1.3515 before falling to lows
near US$1.3400 and was holding near US
$1.3465 in late US trade. The Aussie
dollar fell from highs around US99.65c to
US98.35c, and was near US98.75c in late
US trade. The Japanese yen fell from
82.05 yen per US dollar to JPY83.05, and
was near JPY83.00 in late US trade.
n US crude oil prices fell for a
third straight session on Thursday
following the unexpected rise in weekly
oil inventories. EIA data showed that US
crude stockpiles rose by 2.62 million
barrels against expectations for a
400,000 barrel drawdown. The rise in
inventory was the first in seven weeks.
The Nymex crude oil contract fell by U
$2.00 to US$88.56 a barrel. And London
Brent crude contract fell by US$1.40 to
US$96.76 a barrel.
n Base metal prices fell on the
London Metal Exchange on Thursday in
response to concerns that China may look
at further monetary policy tightening.
The rise in the US dollar also dampened
investor demand for commodities. Most
metals fell between 1.0-3.2pct, however
Nickel bucked the trend up by 0.4pct. And
the gold price followed the oil price.
The Comex gold futures price was lower by
US$23.70 an ounce to US$1,346.50.
n Ahead: In Australia, import and
export data is released. In the US, no
economic data is released.
Outlook: Aus shares set to open lower January 21, 2011 09:08 AM
The Australian share market is expected to open lower today following weak overseas leads. Wall St fell for a second day, London and Tokyo ended the day lower spooked by strong Chinese growth data and the possibility of further monetary tightening. Commodities are expected to drag the local market lower, if China slows fast, and its desire for commodities is reduced those stocks will feel the full impact.
US economic news: The National Association of Realtors showed existing home sales jumped 12% in December, more than anticipated, despite bad weather. The housing sector continues to struggle to recover from a severe slump. The Labor Department reported US initial jobless claims posted their biggest weekly decline in nearly a year, with 37,000 less claims made.
On Wednesday, the Dow Jones Industrial Average, dropped 2 points to close at 11,823. S&P500 lost 2 points to close 1,280 and the NASDAQ slid 21 points to close 2,704. European stocks were lower: London’s FTSE down 109 points, Paris down 12 and Frankfurt down 58.
To Asian markets, stocks were lower: Hong Kong’s Hang Seng was down 416 points, Tokyo fell 120 points and China’s Shanghai Composite was down 80 points.
The Australian share market closed weaker on Thursday. The S&P/ASX 200 Index dropped 51 points to close at 4,784 and on the futures market the SPI is down 12 points.
Turning to currencies and the Aussie Dollar at 8:30AM was buying 98.83 US cents, 62.14 Pence Sterling, 82.05 Yen and 73.35 Euro cents.
Company news: On Thursday shares in Westpac Banking Corporation (ASX:WBC) weakened 0.97 per cent to close at $22.39. Westpac chief Gail Kelly will front a Senate inquiry today and is widely tipped to argue that banking competition is strong in Australia. She will be the fourth of the major bank bosses to give evidence. In its written submission, Westpac has argued to improve the tax effectiveness of savings. The bank also says that competition is vibrant. The Australian Securities and Investment Commission will also give evidence. In the year to 30 September 2010, Westpac Banking lifted its net profit to $6.4 billion.
Yesterday shares in Foster’s Group Limited (ASX:FGL) eased 0.18 per cent to close at $5.55. Merrill Lynch has slashed the company’s net profit forecast by 14 per cent to $710 million for the 2011 financial year. Wet weather and the strong Australia dollar were sighted as the reasons for the cut. Foster’s has taken $3.53 billion in writedowns on its wine assets over the past decade. Shareholders remain tense as they wait for more details on the company’s plans to split its beer and wine businesses into two listed entities. Foster’s reported a loss of $463.4 million in the year to 30 June 2010.
To commodities: Gold is down $23.70 to $US1,346 an ounce for the February contract on Comex, silver is down $1.33 to $27.47 for March and copper is down $0.10 to $4.27 a pound. Oil is down $2.00 at $88.86 a barrel for February light crude in New York.
Last night was a truly bizarre trading session. I don’t know where to
start, the slump in commodity prices or that massive spike in Treasury
While China and the US may be taking or at least talking of a more a
unified approach to things, if this latest love-in is anything to go by,
there is certainly no unity of thought in the market. China’s s growth
numbers yesterday were impressive, GDP was above expectations, as was
industrial production and we have the world’s 2nd largest economy running
at a 10.3% annual pace.
Somehow this is bad news for the world’s commodity/equity markets as it
seems to have sparked fears China may lift rates – from very low levels I
might add. Again, perspective is important here. Inflation is rising
globally, there is no credible counter to that, and that is certainly the
case in China as well. Yet inflation was almost double the current rate -
all the way back in 2008 – what it is today. So there is no need people, to
be wearing nappies at the mo’ and I’m not sure about these market moves
either- they seem somehow overdone.
So crude was down 2% ($88.9) and copper was down 2.4%. Even gold managed to
drop-off, $18 to sit at $1351, despite the supposed heightened anxiety over
Flip over to the US (and the bond market) and it’s a different story. Well
kind of. I mean economic data is coming in on the strong side as well, and
so it seems that the world’s two largest economies are growing at a pretty
solid clip. Last night we saw existing home sales in the US smash it in,
rising by 12.3% in December which was about three times the market
expectation of 4.1% – and that’s after a 6.1% spike in November. At 5.28m,
existing home sales are still below average but not too far below and it’s
clear the market is recovering following a tax distorted slump in July.
The good news didn’t end there. Jobless claims for instance fell back down
to 404k in the week to 14 January from 441k, reinforcing the fact there is
a clear downtrend and continuing claims fell as well. Finally the Philly
index, whilst actually slipping on the headline index to 19 from 20
(historical average is about 5), showed remarkable strength in some of the
components – employment, shipments and new orders.
I guess the difference is that no one seems to expect the Fed to behave
responsibly – no matter how strong growth is, rate hikes are a long way
off. That’s why the curve steepened so aggressively again – up another 10bp
overnight as the 2yr yield rose 6bp (0.62%) and the 10yr rose 15bp (3.46%)
with most of the action following that stronger data. Otherwise the 5yr
yield rose by 13bp (2.05%), while Aussie futures sold off about 6-7 ticks
on a 9-10 tick range. 3s sit at 94.80 and 10s at 94.34.
Whatever the case, growth all good and I’m genuinely surprised by moves in
the commodity and equity space. Global growth is going to be strong this
quarter, this half and this year. Get on board people. I had thought
initially, that some of the commodity and thus equity weakness was FX
driven, although moves here didn’t end up being huge (noting significant
volatility and some wide ranges). Yet as I write, AUD is off 65pips to
0.9887, euro is 30 pips higher at 1.3476, Sterling is down 30pips to 1.5901
and JPY is 83 from 82.15.
In any case, with and hour or so to go, the S&P500 is flat (1282) as is the
Dow (11,842), while the Nasdaq is off 0.6% to 2709. By sector, basic
materials, tech and energy stocks are the key dead-weights, although
utilities, consumer services and financials are buoying the economy. The
SPI for its part is also flattish at 4766.
That’s probably the key stuff, the only other thing to note is that German
producer price are up 5.3% in the year to December from 4.4%, suggesting
upstream price pressure are accelerating. The CBI also reports that British
manufacturers are worried by inflation and everyone seems to be worried
about the BoE’s credibility. Elsewhere, just note the treasury’s TIPS
auction met with weak demand. It was the Treasury’s largest sales of TIPs
($13bn) and it seems the market has reached saturation. Cover at 2.37 was
below the average of 2.97. Given the auction was still over 2x subscribed
it would be incorrect to assume that people are shying away from inflation
protection. It’s more likely the sheer magnitude of TIPS on offer that s
Looking at the day ahead, we get NZ retail at 0845. Remember the common
perception is that a GST bring forward prior to the introduction of the GST
caused a surge in sales which subsequently caused sales drop in November.
For mine the argument is theoretically unsound and I would suggest instead
that there are sampling and non-sampling errors affecting Stats NZ data.
The market is looking for a 1.2% lift in sales for the month (November).
Other than that, watch out for Oz trade prices at 1130 and the German Ifo
survey and UK retail sales.
Have a great day…
housing starts fell by 4.3pct
to a 529,000 annual rate in December, the
lowest in over a year and below forecasts
centred on a result near 550,000. But
harsh winter weather was a factor behind
the weakness. And building permits soared
by 16.7pct, pointing to higher activity
ahead. Meanwhile US chain store sales
were up 2.5pct last week compared with a
n European shares fell from
28-month highs on Wednesday as weak US
housing data and disappointing profit
figures from Goldman Sachs drove
profit-taking. And mining stocks fell in
response to lower metal prices. In London
trade shares in Rio Tinto fell 1.7pct
while BHP Billiton dropped by 1.3pct. The
FTSEurofirst index fell by 1.3pct, with
the UK FTSE lower by 1.3pct while the
German Dax lost 0.9pct.
n US sharemarkets were weaker on
Wednesday. Shares in Goldman Sachs fell
by 3.7pct after weak trading returns
weighed on earnings. But shares in IBM
rose 3.2pct after posting a
better-than-expected profit result. With
an hour of trade to go the Dow Jones
index was down 30pts or 0.3pct with the
S&P 500 down 1.1pct and the Nasdaq was
lower by 43pts or 1.5pct.
n US treasuries rose on Wednesday
(yields lower) as investors drifted back
from equities to bonds in response to
disappointing economic and corporate
profit news. US 2yr yields fell 2pts to
0.57pct and US 10yr yields fell 3pts to
n The Euro and Aussie dollar
steadied against the greenback in
European and US trade after solid gains
in the Asian session. But the Japanese
yen strengthened. The Euro traded between
US$1.3435 and US$1.3535, and was holding
near US$1.3460 in late US trade. The
Aussie dollar held between US99.90c and
US100.75c, and was near its lows in late
US trade. And the Japanese yen lifted
from 82.30 yen per US dollar to JPY81.85,
and was near JPY82.00 in late US trade.
n US crude oil prices fell for a
second day on Wednesday. Investors
weighed up softer economic data while
supply fears continued to ease as the
operator of Alaska’s main oil pipeline
prepared to lift shipments to normal
levels after the recent shutdown. The
Nymex crude oil contract fell by US52c to
US$90.86 a barrel. But the Brent crude
contract rose by US39c to US$98.19 a
n Base metal prices fell on the
London Metal Exchange on Wednesday in
response to weak US housing data. Metals
fell between 0.9-3.6pct with aluminium
faring best and lead down the most after
LME stock levels hit 15-year highs.
Copper lost 1.4pct after earlier hitting
record highs. But the gold price rose
modestly on safe-haven flows. The Comex
gold futures price was higher by US$2.00
an ounce to US$1,370.20.
n Ahead: In Australia, detailed
labour data is released. BHP Billiton
releases quarterly production figures.
In China monthly economic data and
economic growth figures are released. In
the US, the leading index, Philadelphia
Fed index and weekly jobless claims data
By now we’ve read of lot of commentary suggesting that up to 1% will be
knocked of GDP in the March quarter and that GDP growth in the quarter
itself could be negative. I’ve even heard some suggest that we are facing a
recession! At the outset I think this is extreme. Noting that it is still
very early days and that a lot can still happen, the information we have
received since the floods have receded are suggesting a much more modest
impact. It’s not looking like it will be anywhere near a 1% detraction and
the recession call is a stretch.
The impact on coal, less so agriculture, seems to be the main point of
contention. Other areas like housing, retail spending or public and private
investment, will unequivocally make a contribution to state GSP for the
quarter and year as a whole, as well as nationally, to GDP. That’s not to
gloss over the pain that people feel having lost possessions and even more
tragically, loved ones. The tragedy is enormous, but the reality is that
goods need replacing and houses and infrastructure need to be rebuilt. It’s
January now and people aren’t going to sit around and wait till after the
June quarter (if they can help it) to start rebuilding their lives. And
there is a lot of rebuilding to do.
For instance, latest estimates from the Queensland government suggest that
28,000 homes need to be completely rebuilt and that doesn’t even consider
work to those that were simply ‘damaged’. To see the significance of this,
consider that in the 4 quarters to September 2010, about 32,000 new
dwellings were started in Queensland. So we are looking at perhaps 70-90%
new housing starts, in addition to what the usual demographic trends would
suggest for a given year. The worst case, running with 50% insurance cover
is a 35 to 45% lift in new starts which is still a sizeable rebuild.
Now the actual dwelling investment lift to GDP probably won’t begin to
emerge until Q2. Nevertheless, the employment impact will start to hit in
Q1, as will the income and consumption impact. Think of the building
supplies that need to be purchased, the carpets that need to be bought, the
curtains, toasters, refrigerators and cars. Overall I estimate these will
add about 0.1%pt to GDP in the March quarter and about double that in Q2.
Over the year we can look for at least 0.5%pt lift to GDP and up to 1%pt
The impact from mining on national exports and production is harder to
determine. For the year as a whole, negligible. That’s the reality. But
typically this is where people have suggested the largest negative impact
to quarterly GDP will come from. So, what do we know?
Firstly, Queensland’s importance stems from its deposits (by and large) of
metallurgical coal. They pump out about 70% of the stuff. Most of the
nation’s thermal coal (80%) is produced elsewhere in the country and I
suspect any production lost here can be made up elsewhere (a lot of it at
least) over the quarter. So let’s take that out of the equation.
So metallurgical coal is just over ½ our coal exports which in turn are
about 20% of total exports. So (noting Queensland accounts for about 70%)
we are talking about 7% or so of export volumes at risk here. The problem
is we don’t know how much production has been hit or how much our exports
will suffer exactly (destocking at the ports and at the mines themselves
etc). We can only guess at this stage and remember we are talking about the
quarter as a whole not just one month. That said, people often do try to
obtain an estimate by referring to lost production and export activity
following the 2008 floods. In that period, Q1 production of saleable coal
in Queensland fell about 17%, coal export volumes nationally fell about 9%
(about 0.4%pts from GDP), noting that falls of 3, 4 or even 5% are within
the normal quarterly variation anyways and that exports as a whole rose 2%
in the quarter (adding 0.4%pts to GDP which, in turn, rose 1% in the
This time round, if exports of coking coal from Queensland fall 40%-50% for
the quarter, then total exports would be down about 4% all else equal and
that would be about a 1% detraction to growth. So you need exports of
coking coal to fall by half over the quarter, to get a 1% detraction to GDP
The question is, how likely is it that exports of metallurgical coal will
fall 50% for the quarter? Or 40% with a 10% drop in thermal – pick your
Well to start, the Port of Dalrymple – in one of the flood affected regions
- reports it has exported about 60-70% of capacity so far in January, but
then again for the year as a whole in 2010, they operated at about 70% as
well – largely due to factors outside their control like weather induced
speed limitations for rail, regular normal run of the mill mine operating
issues etc. Gladstone was apparently more affected by they report they will
be operating this weekend. Point is, their operating capacity isn’t that
out of kilter. Port infrastructure overall seems a-ok and is ready to ramp
What about rail infrastructure? Well, Queensland National suggest that
damage by and large hasn’t been as bad as feared. For instance the
Blackwater coal railway is largely undamaged according to the rail, and
they could be up and running this week. This is a region that by itself
produces approximately 6% of Queensland’s saleable coal. Other lines such
as Goonyella, Newlands and Moura are all open but perhaps operating at
reduced capacity (Goonyella for instance at about 70% on latest reports).
So if the ports are operating at normal capacity and have the capability to
ramp things up, if major rails lines are largely up and running (or not far
from) then it all boils down to the mines and how efficiently and
effectively they can ramp up production.
Now on that front getting information is proving to be very difficult. The
miners themselves, some of them, have been very cagey (for obvious reasons)
but it seems that most of the larger mines are operating or have limited
flood damage with relatively minor damage to infrastructure as well. My
sources tell me that things should largely be up and running over the next
few weeks at the latest. Many mines are already producing and building up
stock to transport when rail lines open this week. If that’s the case,
we’re not looking at anything near a 40 or 50% drop in coking coal exports.
More like 13% and that’s looking to be a fairly pessimistic forecast.
With that in mind then, we’re looking at a (all else equal) 1.0% fall in
total exports or a 0.1pt detraction from growth. If you want to get mega
bearish on me then lets just round it up to a 20% drop in coking coal
exports for the quarter as a whole, or a 0.16%pts drop in GDP.
On the agricultural front, the impact looks to be minor at this stage, with
the harvest either largely completed before flood waters hit, or unaffected
by the floods themselves. In any case, Australia was facing a record grain
harvest and while this may be lower now due to the floods and certainly
quality has been hit, production still looks set to be high. Even in
Queensland which is a relatively minor player in the wheat stakes, the
wheat harvest was largely completed by early December. Ditto fruit and Veg.
Looking forward, it is more likely that future production will be very
strong. Summer production of rice and cotton in particular is expected to
grow rapidly (in some cases well over 100%). On the grain front, much will
depend on future rainfall but if we get a bit of a dry spell, the summer
crop in the eastern states could be very high indeed and the key reason for
this is very high soil moisture levels. This can be expected to provide
significant boost to yields. At the moment, the Bureau of meteorology
suggests there is a 60-70% chance of above average rainfall in Q1.
The bottom line then. Growth in 2011 will be boosted by between 0.5% and
1%. Q1 growth will probably be down by 0.1% at worst (that’s the hit to
mining partially offset by a lift in consumption and investment). My
current forecast is that GDP for the quarter as a whole will be about
0.7%q/q or 2.7%y/y.