n The US consumer price index rose
0.5pct in December, ahead of forecasts
centred on a rise of 0.4pct. The core
rate (excludes food and energy) rose
0.1pct. Retail sales rose 0.6pct in
December, below forecasts tipping a rise
of 0.8pct. Industrial production rose
0.8pct in December, ahead of forecasts
for a 0.5pct gain. And consumer sentiment
eased from 74.5 to 72.7.
n The People’s Bank of China has
raised the bank reserve requirement ratio
for the seventh time since early 2010.
The lift of 50 basis points takes effect
on 20 Jan.
n European shares eased slightly
on Friday as investors digested the
latest news on Chinese monetary policy.
Mining shares fell after the news from
China. In Lond trade shares in Rio Tinto
lost 1.5pct while BHP Billiton lost
1.8pct. The FTSEurofirst index fell by
0.1pct, with the UK FTSE lower by 0.4pct
while the German Dax edged 0.01pct
higher. But over the week the
FTSEurofirst index rose by 1pct.
n US sharemarkets rose on Friday
with investors heartened by solid
earnings from JP Morgan and Intel. The
Dow Jones index rose by 55.5pts or 0.5pct
to 30-month highs with the S&P 500 up
0.7pct to 28-month highs and the Nasdaq
rose by 20pts or 0.7pct. Over the week
the Dow rose by 1.0pct while the S&P 500
was up 1.7pct and the Nasdaq finished
higher by 1.9pct.
n US longer-term treasuries fell
on Friday (yields higher) as investors
squared positions ahead of a holiday
weekend. US 2yr yields were steady near
0.58pct and US 10yr yields rose 3pts to
3.33pct. Over the week US 2yr yields fell
2pts and US 10yr yields were steady.
n The US dollar firmed against the
Japanese yen and Aussie dollar in US
trade on Friday but the Euro tracked
sideways. The Euro held between US$1.3310
and US$1.3455, ending US trade US$1.3375.
The Aussie dollar eased from highs near
US99.80c to US98.55c, before ending US
trade near US98.95c. And the Japanese yen
eased from near 82.40 yen per US dollar
to JPY83.05, ending US trade near its
n US crude oil prices rose on
Friday to 27-month highs with optimism on
US earnings weighed against Chinese
policy tightening. The Nymex crude oil
contract rose by US14c to US$91.54 a
barrel. The expiring Brent crude contract
rose by US62c to US$98.58 a barrel. Nymex
oil rose by 4.0pct over the week.
n Base metal prices were mixed on
the London Metal Exchange on Friday.
Aluminium fell 0.5pct and zinc lost
0.3pct but other metals rose 0.4-2.0pct.
Over the week base metal prices were
generally higher. Nickel rose 6.9pct and
other metals rose 0.4-2.4pct, except
aluminium, down 2.0pct. And the gold
price fell with the Comex gold futures
price lower by US$26.50 an ounce to US
$1,360.50. Gold fell by 0.6pct over the
n Ahead: In Australia, data on
lending finance, car sales and the
monthly inflation gauge are released. In
the US, markets are closed for Martin
Luther King Jnr day.
Our vision is to be the best value, most innovative and approachable bank
in Australia with an absolute focus on customer satisfaction.
There is not a lot in the form of mind altering data for Australia this
week. For Oz it’s all 2nd and third tier stuff, but the flow is steady. I’m
probably going to be more interested in the consumer related data flow this
week. That is, motor vehicle sales data today (1130) and the consumer
sentiment numbers on Wednesday (1030), although we do get some useful
construction data on Wednesday and Thursday and of course trade price data
on Friday (1130).
Naturally enough, my interest in the consumer related data results from
this supposed debate going on about the health of the consumer, which I
briefly touched on last week. As I mentioned last week, the retail
association argues the sector is struggling. The monthly retail sales data
would support that view, although more reliable data elsewhere doesn’t. As
a reminder, the broader measures of consumer data in the national accounts,
the fact that retailers were a key employer in 2010 etc etc, all suggest
consumer spending is robust.
Indeed when I speak to retailers myself (mainly senior sales staff), and I
have across several major Australian cities, the feedback I get is
consistent with that view. Responses typically suggest that sales have been
“solid”, “pretty good” or “strong but certainly not a record year”. This
makes sense. I mean to believe that consumer spending is weak you
literally, I mean literally, have to accept that of the 360 odd thousand
new employees we’ve seen this year – roughly $15bn in additional post tax
income or $1.25bn per month (5% of retail) – none of them need to eat or
wear clothes, have any furniture or even live anywhere – not to mention the
fact that they have must have absolutely no interest in anything else.
Other than that, we get TD’s inflation gauge today, DEWR’s skilled vacancy
index Wednesday (11) and consumer inflation expectations (Thursday 1030).
Looking across the Tasman (NZ) we do actually get some mind altering data
out and the big news is the CPI on Thursday (0845 Oz time). We already know
the drill here. The GST increase on October 1, by itself should lead to
about a 2% (give or take) increase in prices for the quarter. With that in
mind, I’m looking for a 2.6% quarterly lift which is only a touch above the
RBNZ’s forecast of 2.3%q/q (which is also the market forecast). Annually,
CPI should rise to just below 5% from a 1.9% increase in Q3.
Otherwise the Kiwi’s also put out retail sales on Friday (also 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 problems with the seasonal factors.
The market is looking for a 1.2% lift in sales for the month (November).
For the rest of the globe, we get a reasonable flow of data although not
much of it from the US. Indeed, it’s Martin Luther King Day so markets are
closed on Monday. For the rest of the week we get the Empire State
Manufacturing survey on Tuesday (alongside TIC flows and the NAHB housing
market index). Wednesday we see construction work done and housing starts
with the Philly Fed index and existing home sales due Thursday. The general
flow of the data is expected to be fairly solid with housing data forecast
to pick up and the manufacturing surveys expected to remain elevated.
The big guns are out on Thursday with China’s GDP data, CPI, retail sales
and industrial production (all expected 1300 Oz time). It’s all expected to
be pretty strong with GDP in particular forecast at 9.4% in Q4 from 9.6% in
Elsewhere just watch out for the German Zew and Ifo surveys and in the UK
we get CPI, retail sales and labour market data. The BoC also meet (no
Hope you have a good week.
Australian property prices overvalued: IMF
By Adam Smith | 17 Dec 2010
Australian house prices could be overvalued by as much as 10%, a new International Monetary Fund report has claimed.
The report has said though housing values in Australia are inflated, strong population growth and rises in income are expected to support current house prices.
“The current historically high terms of trade are expected to be long-lasting,” the report’s authors Patrizia Tumbarello and Shengzu Wong said.
The report indicates the lack of land availability in capital cities has driven up property prices.
“The increasing scarcity of land in main urban centres in Australia is an important factor. The fact that such a high proportion of Australia’s population live in two major cities tends to drive up average house prices,” the report commented.
The authors of the report have gone on to say that housing shortages could be addressed by following the Henry tax review recommendation that stamp duty be scrapped in favour of a land tax.
It was a bit of a sluggish night overall, the market having to digest a number of cross currents and a drop in volumes. On the positive side was the economic data. US Industrial production was 0.4% higher in November, which was modestly stronger than expected, and the Empire State manufacturing survey bounced to +10 from -11 (which is around the average). Now this is all good news and in conjunction with yesterday’s retail numbers, paints very positive picture of growth in the US .
Weighing on that though was a timely announcement from Moody’s that they are putting Spain on a debt review for a possible downgrade. This came after the Spanish parliament ratified changes that would help bring the budget deficit down to 6% by end 2011. It’s interesting that the ratings agencies love to hate countries that are actually making an effort at reducing their deficit. On the other hand, for countries like – I don’t know – the US , who are printing money and making no effort at bringing down the deficit – not even a hint. The mind boggles.
Not sure the announcement had a major impact, though it probably weighed a bit. So for instance in FX land, eur dropped a big figure to 1.3251, but it’s also likely that Greenbacks are seeing a bid from the better run of data anyway. Not necessarily Moody’s related. The dollar index itself was up 0.6% with AUD down to 0.96872 (from 0.9949 at 1630), JPY was at 84.25 from 83.82 while Sterling was down two big figures to 1.5569. The issue with Sterling were some poor jobs numbers out last night. In what had been an improving trend, the unemployment rate ticked up to 7.9% in October, from 7.7% and so Sterling was dumped.
Debt markets however largely brushed off any negativity, though didn’t seem too enthused about anything else. Spanish bond yields were actually lower after Moody’s announcement, the market instead focussing on the government’s deficit reduction measures and in the US , treasury yields pushed higher. So clearly no safety bid occurring. The interesting thing is there was probably a good case to see bond prices push higher after what was, at face value, a weak CPI number. CPI rose by 0.1% in November to be 1.1% higher annually from 1.2%. The things is this weaker annual number is a bit misleading as most of it comes from owners equivalent rent, which is a rubbery figure at best, but accounts for a huge chunk of the CPI. Accounting for that, annual inflation is well over 2%.
Moreover, recent figures suggest inflation is more elevated and actually accelerating – 1.8% on a 6mnth annualised basis. So is it true to say disinflation is a problem, deflation a material threat or ‘inflation too low’? Not by these numbers it isn’t. So at the time of writing (about an hour to go) the US 10yr yield was 7bp higher at 3.52%, the 5yr yield was 4bp higher at 2.1% while the 2yr was 1bp higher at 1.2%. Aussie futures for their part were little changed, 2s at 94.65 and 10s at 94.26.
As for equities, things aren’t great. The European session saw the major indices down between 0.2% and 0.4% and the USD is looking comparable so far, with the S&P500 off 0.6% (1234), the Dow off 26pts to 11450 and the Nasdaq off 0.4% to 2616. Most sectors on the S&P were weaker with financials, telecoms and utilities the key underperformers. As for the SPI, it was down 0.3% to 4755.
In other news and data. The NAHB housing market index was steady at +16 in December (expected), while US mortgage applications were down 2.3% in the week to December 10 with new purchases off 5% and refis off 0.7%. In Norway the Norges bank left the depo rate at 2% although the Riksbank ( Sweden ) hiked the repo rate by 25bp to 1.25%. That’s about it.
To the day ahead, there isn’t much for OZ. The RBA’s Financial Stability Review is about it although in NZ the business PMI is out at 0830. Elsewhere its worth keeping an eye out for the European PMIs, UK retail sales, US housing starts, initial jobless claims ad the Philly Fed index.
Have a great day…
It was another savage session for Treasuries overnight with the 10yr yield spiking up to a high of 3.33% (+14bp from 1630) before a bid developed to calm things down. As I write, the 10yr is up about 5bp to 3.24%, the 5yr +7bp to 1.85% and the 2yr +7bp to 0.62% – 10yrs have had their biggest two day move since September 2008 which is quite remarkable. The $21bn 10yr treasury auction wasn’t even that bad, wasn’t that good, but it wasn’t that bad with cover at 2.92 compared to 2.8 last month and a 12 auction average of 3.07.
So it looks like those tax cuts have caused a bit of a long squeeze and there is plenty of chatter about how the additional stimulus, well the continuing stimulus, may result in the Fed cutting short their Qe2 plans, which is awesome if you live in fairyland and think Bernanke was actually targeting growth or inflation (or whatever else is convenient for him to mention).
For others, the Bernank is just monetising debt and trying to force a rebalancing of global growth, in which case the tax extension is unlikely to force a re-think of Qe2 (quite the opposite). Either way though, treasuries are a sell, although how much further they can go is unclear. I had thought that 3.25% would be the upper limit in this new range although we’re pretty much there already. And then of course there is the global data which continues to surprise on the upside. It’s pretty obvious that material 2H slowing didn’t eventuate and Q4 growth is looking rock solid; it not inconceivable that 10yrs could be closer to 4% over coming weeks.
Check out global industrial production, it is recovering at a rapid clip and German industrial production, out last night, again surprised on the upside. At 2.9% the October production figure was almost 3 times the market expectation. German exports dipped in the same month, yep sure, but this comes after a very strong September figure. It’s all good. Even the Brits are having a good run with their manufacturing output and according to the Confederation of British Industry, this may get better still with the new orders index rising to -3 (highest in over 2yrs) from -15 and a median expectation of -13. With all that to consider I think there is only one way for bonds to go (medium term).
Equities on the other hand, had a reasonably lacklustre session, the major indices in Europe between -0.4% and +0.4% with not much activity in the US either. With about 30mins to go the S&P500 is up only 0.2% (1226), the Dow is about 5pts lower (11354) while the Nasdaq is up 0.3% (2605). Financials look to be having a great session so far, up 1.4% and leading the overall index higher. Otherwise, technology and consumer stocks were the other main outperformers with basic materials industrials, utilities and energy stocks the main deadweight’s. The SPI for its part is 0.3% higher at 4714.
Commodities were mixed overnight with copper up another 1.4% although crude was down 0.3% ($88.43) and gold fell about $19 to $1383. Otherwise AUD is little changed at 0.9791, EUR is 24pips higher at 1.3257 while JPY also pushed a little higher and sits at 84.05. Sterling in contrast had a solid session rising 86pips to 1.5798 on the back of that manufacturing orders data.
That’s about it for price action, there were a couple of other news worthy item including the RBNZ which kept rates unchanged at 3% as expected. If anything though, the Bank has become more dovish and its pretty clear they aren’t going to do anything for a while. I’ll write more about this at a later date, but suffice to say I don’t think things are as bad as the Bank thinks, but certainly there won’t be any Bank action for a while yet. Finally, US mortgage applications fell 0.9% in the week to December 3 although applications for new purchases rose 1.8%.
Looking to the day ahead, there is some reasonably decent data today, including the final estimate of Japanese GDP, NZ credit card spending data and of course the Australian labour force print (1130). The median market expectation is that employment will rise 20k with the unemployment rate expected to slip to 5.2% from 5.4%. I’m not too far off that with 15k and 5.3%. As to the risks, I think they are fairly symmetric. History tells us its all to the upside, although jobs growth has been exceptionally and consistently strong, so it would be reasonable to expect a moderation at some point. Tonight, watch out for German CPI (final estimate), the BoE’s decision (some people are seriously talking about more money being printed) and US jobless claims.
Unfortunately it doesn’t appear that Ireland’s bailout has done much to stymie the contagion. Spanish 2yr bond yields rose to 3.7% from 3.48% while the 10yr rose to 5.42% from 5.17% (spread to bunds at a record high). Italian (10yr spread to bunds also at a record) and Portuguese yields were also up and in a move that makes no sense at all, Ireland ’s 10yr bond yield rose to 9.25% from 9.19%. It’s a tough one for the Europeans, as most of the ‘solutions’ presented, at their core, once you strip out the rhetoric and deceit, involve dissolving the union; which is hardly a solution at all. Indeed it would make things a lot worse and would do nothing to aid regional stability over the long-term.
But other than these extremist rantings, there is not a lot in the way of reasonable or practical advice on how to restore order. It‘s hard to see what will act as a circuit breaker to be sure. The market is in a frenzied state at the moment with no clear catalyst for change. Even agreement on the long-term European Stability Mechanism – a permanent European bailout facility agreed to on Sunday, failed to stop the rot. To me it seems that, rather than try and placate the market (which isn’t working), Spain and Portugal may find it more beneficial to have to look at the whole system, the process of how they raise money and issue debt. It’s not a process that appears to be working for the peripherals at the moment. The system is breaking down and it would probably pay for them to think outside the square. Food for thought at least.
Needless to say, eur was hammered again, falling by almost a big figure at the time of writing to 1.3121. Not that this is a bad thing for the euro zone. Sterling was off 35pips to 1.5567, AUD was little changed at 0.9623 while Yen was at 84.26 from 84.07.
There was also little love for European equities, down between 1.7% and 2.2% although moves across the Atlantic appear less sombre. With about an hour of trading to go, the S&P500 is up about 0.03% (1189), although at the low it was down 1.3.%. A late session rally seems to be developing, led by financials, energy and basic materials, in turn, sparked by decent rises in the commodity space. Punters here seem more taken by the stronger thanksgiving retail data in the US . Currently, crude is up 2.4% which, given USD strength, is especially remarkable. Copper is up 0.3% and gold rose smalls to $1367. Elsewhere the Dow is off 20pts to 11071, the Nasdaq is down 0.2% (2529) and the SPI is 0.2% lower at 4611.
Now on the debt side, treasury notes did rally, with the 5 and 10yr treasury yield off about 6bp each to 1.49% and 2.82%. Note however that both are well above pre-QE2 rates. The 2yr didn’t do a great deal and is off only 2bp. Considering everything going on, these moves aren’t huge and there still seems to be a great reluctance to take bonds higher (in price) and that’s with the Fed buying an additional $9.4bn of Treasuries last night. Aussie futures were a few ticks higher (on a 5 tick range) with 3s at 94.92 and 10s at 94.52.
There wasn’t a lot of data to speak of last night. The key release was probably the euro zone economic confidence survey which rose to 105.3 in November from 103.8. Interesting to see that European businesses and consumers don’t seem to be phased by the ‘debt crisis’. Otherwise the Bank of England report that 47k new mortgages were approved in October. In the US , Obama is proposing a 2yr public sector wage freeze.
There is a fair bit of data to watch today. We kick off at 0845 with Kiwi building permits. At 10 we get South Korean industrial production with Japanese industrial production out at 1050. Aussie data includes RP data-Rismark’s house price series (1030), and RBA Assistant Governor speaks at 11 and then building approvals, private credit and the current account (all at 1130). Tonight, watch out for euro zone CPI and unemployment and then in the US, we get house prices, consumer confidence the Chicago PMI and Milwaukie NAPM. Indian GDP is also due out at some point and the Bank of Portugal is due to issue its Financial Stability Report.
It was pretty much a data vacuum last night and so much of the news flow remain focussed around Ireland and the ‘peripheral’ euro zone economies. Having now accepted a bailout, concerns are mounting that political instability will delay any bailout action. It’s a never ending saga. Nevertheless, short-term Irish yields fell sharply overnight with the 2yr at 4.84% from 5.26%, although the 10yr bond was only down 2bp to 8.096%. Portugal is apparently next on the hit list and seriously, in the absence of anything else to focus on, it’s a great bet ‘fears’ will escalate, noting that It’s going to be a harder target. All these ‘crisis’ offer a great opportunity to make money though.
There is very little risk, medium term, of any sovereign default in the euro zone and I reckon this should always be the main strategic position. Why is there little risk? Well as discussed earlier in the year, any default would likely fracture the euro zone and this simply isn’t going to happen. The economic and political costs are too high and the costs of bailout pale in comparison. Also note that as an economic entity, the euro zone is in a much, much better position than the US. They’ve got the money to deal with any flare ups and while conflicts will inevitably arise, things are under control. As a result, I still think trading tactically around these events will continue to be very profitable. Note however, that Portuguese yields fell slightly overnight with the 2yr down to 4.21% from 4.29% and the 10yr at 6.72% from 6.74%.
While yields in Ireland and Portugal were lower, the euro got smashed and as I write its down about 144pips to 1.3605. Sterling is down about 70pips to 1.5945, AUD is off about the same to 0.9856 while Yen sits at 83.31 from 83.45. The general mood from punters I’ve spoken seems to be one of indifference. No one seems to think the sky is falling or anything and there is certainly no concern that any of the peripherals will default or that the euro zone will break up. It’s more the case that going into the Thanksgiving holiday (and end of year more broadly), with everything going in Europe and while China is trying to rein in liquidity, there doesn’t seem to be any point in taking much risk.
The stronger USD and recent actions by China to restrain inflation saw commodities weaken across the board with crude down 0.3% ($81.74), copper was down 1.9%, and softs were generally softer. Gold pushed a little higher though to sit at $1362.
This generalised risk aversion helped a bid for Treasuries but the primary factor driving yields lower appears to be a strongly bid 2yr Treasury auction. Cover was at 3.7 which was better than the average of 3.2 and indirect bidders took 38.3% of the issue which is about average. At the same time, the Fed bought $8.257bn of treasuries ranging from Feb 2018 to November 2020. At the time of writing the yield on the 2yr was off 4bp to 0.47%, the 5yr was down 11bp to 1.43% and the 10yr yield fell 7bp to 2.81%. So far it looks like the new range for the 10yr post Qe2 will be in the order of 2.5% to 3% which is little changed since August.
In the equity space, stocks were down between 0.3% and 0.9% in Europe, while the Dow and the S&P look to be off 0.4% to 11155 and 1195 respectively. Most sectors look to have taken a hit but financials, energy and telecommunications are the key laggards so far. Otherwise the Nasdaq was up 0.2% (2523) and the SPI was 0.7% lower (4631).
That’s really about it, pretty boring. So looking at the day ahead, there is nothing out for OZ and across the Tasman, we get NZ 2yr inflation expectations at 1300 (AEDT). Tonight, look out for the final estimate of German GDP, the EC PMIs, the 2nd estimate of US GDP (expected to be revised up to 2.4% from 2.5%), existing home sales, the Richmond Fed manufacturing index and the FOMC minutes.
Hope you have a great day…