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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You can see why the ECB is becoming concerned about inflation – any sensible central bank would be, should be. This is something I’ve been warning about for some time and the unfortunate reality is, it’s all coming to pass. The global economy is recovering at a rapid clip. Food prices globally are rising fast – wheat, corn, meat, you name it. Ditto energy prices and don’t talk to me about Dr copper – just off a record. For those that pay attention to events in Asia, the Bank of Korea hiked rates yesterday in a surprise move (25bp to 2.75%) with that country very concerned about inflation. The President has declared a ‘war on inflation’ cutting tariffs (among other steps) in an effort to help keep things under control. It’s no wonder break-even inflation rates are pushing higher.
There are a number of driving factors here of course; weather related issues, rising global demand etc, near zero interest rates – blah blah – and underpinning it all is vast ocean of liquidity that central banks will have little control over. The fact is – the US can do little to shrink its balance sheet, except over a very long period of time, without a destabilising (potential surge) spike in market rates. This ensures they will fall way behind the curve and the fact they are already behind the curve only makes things worse.
Now Trichet wasn’t talking about an immediate rate hike, indeed the ECB left the cash rate at 1%. But the Bank did note upside risks to inflation over the short-term. I guess they didn’t really have a choice as inflation is already above target (as it is in the UK also). So I reckon that going into a recovery they are still being way too cautious. Especially on the medium term outlook which they see as roughly balanced.
The main risk of course is the ongoing hysteria over European debt. Who knows when this will die down. A couple of successful auctions have helped calm fears a lot – as have comforting words and support from China and Japan. So for instance Spanish (3bn 5yrs) and Italian (6bn 5 and 15yrs) debt auctions last night were both met with strong demand, although rates paid were up to 1% higher than auctions in November. In any case Germany’s finance minister seems confident that European leaders will have a comprehensive package by March that should help deal with sovereign debt issues.
The immediate market reaction, apart from a sharp drop in sovereign CDS and peripheral bond yields, was a surge in euro. As I write it is up about 2½ big figures to 1.3365. Sterling for its part rose just under a big figure to 1.5840, while AUD rose 30pips to 0.9981 just breaking though parity again earlier in the session. JPY slipped to 82.74 from 83.
Treasuries were interesting in that they had been selling off for much of the session, prior to the Treasury’s 30yr bond auction. Just prior to the auction, the NY Fed thought they should step in to intervene and bought the most ever under Qe2. The Fed took $8.4bn of Jul-16’s to Dec 17s which saw punters cover their shorts and a nice little bid develop for the auction. In the end though the auction only saw average demand. Cover at 2.67 was around last year’s rate while indirect bidders took 37.8% which was slightly above average. Questionable tactics from the Fed though for sure.
As I write the and with about an hour to go, the 10yr yield sits at 3.31% (down 7bp from 1600), the 5yr at 1.91% (also down 7bp)and the 2yr at 0.58% (down 2bp). Aussie futures were little changed on a 5 tick range. 3s are at 94.86 and 10s 94.44.
In the equity space, European stocks were generally weaker – between -0.6% and +0.1% – while in the US, the major indices were down about 0.2% with an hour or so to go (S&P500 at 1283, Dow at 11,721 and Nasdaq at 2733). Nearly all sectors were down on the S&P (except telcos) with health, basic materials and financials the key dead weights. Commodities were otherwise weaker with crude off 0.5% ($91.36), copper fell 1% and gold is down
Bits and pieces otherwise. Initial jobless claims (US) rose to 445k in the week to January 8 from 410k, although the numbers are usually very volatile over this period. Trend is still down sharply pointing to ongoing rapid improvements in the labour market. Elsewhere, US producer pries rose by 1.1% in December (above market forecasts for 0.8%) with the annual pace at 4% from 3.5%. FOMC chair Bernanke, in a panel discussion, proved yet again how little he knows about economics, arguing that his forecast growth of 3-4% in 2011 would be insufficient to lower the unemployment rate. Note that in the period from 2004-06 GDP growth averaged 2.75% and the unemployment rate fell about 1.5%pts. Seriously, sometimes I lay awake at night and I weep for this guy (do your research man!). Finally, the US trade deficit slipped to $38.3bn in November from $38.4bn in the month prior as exports rose 0.8% and imports rose 0.6%.
There is very little in Australia today or even in our protectorate, NZ. Most of the action, of course, will be in the US and here we get a pretty solid run of data. Retail sales and industrial production are the two key releases and the market is looking for solid retail spending and industrial production. We also have a couple of Fed speakers and in Europe, CPI figures for December are released.
Hope you a have a great day…
By Bonnie Malkin, Sydney 5:18PM GMT 09 Dec 2010
Mark Arbib, the Australian sports minister and a key power broker within the ruling Labor Party, was considered a valuable political contact in Canberra and had met US diplomats “repeatedly” since 2006, according to the cables.
Mr Arbib, who played a large role in the political coup to remove Kevin Rudd from the prime ministership earlier this year, has strenuously denied that he is spying for the US.
He issued a statement saying he was “publicly known as a strong supporter of Australia’s relationship with the United States”.
10 Dec 2010
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09 Dec 2010
09 Dec 2010
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“I, like many members of the federal parliament, have regular discussions about the state of Australian and US politics with members of the US mission and consulate,” he said.
However, the Sydney Morning Herald newspaper, which reported the cables under the headline “A Yank in the ranks”, said that the documents revealed that Mr Arbib kept US officials briefed on the inner workings of Australia’s government and ruling Labor party.
He was described as an influential “right-wing power broker and political rising star” who had provided detailed briefings including candid commentary in the run up to the removal of Mr Rudd by his deputy Julia Gillard.
After the recent election, Mr Arbib was elevated from the minor ministry of employment participation to the portfolios of indigenous employment and economic development, sport and social housing and homelessness.
US diplomats said he was “an astute observer and able conversant on the nuts and bolts of US politics”.
Mr Arbib’s colleagues have described the cables as “dinner party gossip” and denied that he was spying for the US.
But the information will further embarrass the Australian government, which is dealing with the fallout from several of the WikiLeaks cables.
On Wednesday Mr Rudd, who is now the foreign minister, was described in US diplomatic cables as a “control freak” who had presided over several “significant blunders” while in office.
Earlier this week he was also shown to have urged the US to use force against key trading partner China if “everything goes wrong”.
The RBA’s meeting this Tuesday is unlikely to produce another rate hike, we got that when the commercial banks hiked following the November 2 meeting. In terms of market pricing, no economists expect the RBA to hike and futures have no chance of hike priced in and if anything, a very modest chance of a cut – don’t get excited about that though.
There is a lot of talk about the prospect of a more dovish RBA statement following the decision and while that’s always a possibility I’m not sure that the RBA or indeed the RBA board will be feeling that dovish.
You have to acknowledge, and I do, that it has been a good week for the bears (on the economy at least). At face value the retail figures and the soft GDP figures suggest the economy is slowing sharply and certainly some commentators believe just this. Nevertheless, and as I briefly discussed on the day, the headline GDP figure gives a misleading signal as the weakness was driven by base effects, statistical noise and producers underestimating growth (running down inventories).
Consequently I think it’s wrong to conclude from these figures that the economy is slowing sharply. Domestic demand growth (what consumers, business and government actually spend) is still robust, rising 0.6%q/q after 4 quarters of growth averaging 1% and annually, growth is an above trend 4.4%.
I mean it doesn’t make a lot of sense to conclude the Australian economy is slowing. Interest rates are only at average levels. They are not restrictive and I don’t think it’s accurate to suggest that the nation is straining under the weight of restrictive monetary policy. Moreover, jobs growth is very strong and the unemployment rate is very low. Note that we get another update on the labour market this Thursday (1130) and the median market expectation is that 20K (me at 15k) jobs were created. The unemployment rate is forecast to dip to 5.3%.
This, by the by, is one of the reasons I don’t think we can be confident of the signal the monthly retail numbers are giving – you don’t usually have a sluggish retailing sector when jobs growth is so strong. Don’t forget we have been here before, numerous times. Mid-year for instance, things were looking dire in the retail space, along comes an ABS revision and all of a sudden things weren’t so dire.
The opposite occurred this time round. Monthly retail sales were looking solid, along comes one weak month and some revisions, all of a sudden things look soft. My point is, you’re not going to get an accurate picture of the retailing environment when they are subject to such swings (something that it evident in the monthly retail components as well, swings have been huge). Nor are you going to get an accurate picture of the retailing environment from the retailing association. So think big picture, look at the whole canvass and you’ll be able to make a more precise assessment of where the Australian economy sits – and of course profit from any mispricing.
For instance, IBs look expensive for mine. Not even one rate hike is priced into the curve at this point (46% to June) and while I reckon future rate hikes will occur less frequently, I don’t quite think they’ll be that infrequent. I still think there will be 2 rate hikes in the first half, at this stage one each in Q1 and Q2, based largely on global growth prospects – which is why I think 10yrs look expensive as well.
Risk appetite is coming back, the global economy is much, much stronger in the 2H10 than had been projected and there is no sign of this material slowing that has been continually touted. 2011 will no doubt be more of the same – except much stronger. There is an extraordinary amount of policy stimulus globally and that doesn’t look like its going to change any time soon. Indeed the Bernank is apparently about to argue on 60 minutes (11am today Oz time) that he won’t rule out further quantitative easing. US data outside of that is reasonably light and includes initial jobless claims (Thursday), trade data and the Michigan consumer confidence survey (both Friday). The US government then plans to sell $66bn in coupons this week and monetise (this week alone) up to 1/3 of it by buying $15-$22bn worth of treasuries off itself and printing the money to do it.
In Europe , watch out for German factory orders (Tuesday), and then German trade data and industrial production on Wednesday. The UK has industrial production on Tuesday and the BoE meeting Thursday (no changes expected). Otherwise watch out for Chinese trade data on Friday and central bank meeting in Canada , NZ (Thursday morning at 7am) and South Korea (no changes expected).
Don’t forget ICAP’s charity day this Wednesday – dig deep, as all profits earned go toward helping those in need and as we know, good things happen to charitable people. So let’s be charitable!
Hope you have a great week…
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.
There was little data or news out last night. US bond markets were closed for Columbus day, and action was reasonably muted in the FX and equity space. We’re all still waiting for the Fed, the FOMC minutes tomorrow morning and the run of Fed speak - and that’s not to forget the strong dataflow towards week’s end. Remember this dataflow, and ensuing numbers out over the next few weeks are critical. We are at an important juncture and it doesn’t pay to downplay it. Uncertainty is high and there are a variety of views out there. After this run of data we’ll be a in a much better position to assess some of the downside risks being touted – to determine who is likely to be right. We’ll pretty much have Q3 sorted and we’ll even get a glimpse into Q4. We’ll have a better idea as to whether the global economy will indeed deteriorate as many expect, accelerate or just plod along.
For the moment, markets are still expecting the Fed to print more money and that’s the best bet given their rhetoric. Nevertheless, USD did bounce a bit last night as traders took some profit. At the time of writing, Euro was down almost a big figure to 1.3875, Sterling was off 64pips to 1.5875, AUD was broadly unchanged at 0.9849 and Yen rose to 82.18 from 82.03. While we may have seen a bit of a bounce last night, emerging market concerns about USD weakness clearly remain high. Brazil has already taken measures to impose a tax on foreign bond purchases and Thailand announced yesterday that it is considering a similar action. Hot money flows are already a problem for emerging markets – as, by the by, are rising food prices caused by the falling dollar.
The reality is that if the Fed insists on debasing its currency, we’ll be seeing a lot more of this type of action. So perhaps the PBoC’s decision to hike the reserve requirement by 0.5% to 17.5% (1st move since May) was driven, in part, by these hot money flows. Whatever the case, it is intended as a temporary measure (about 2 months) for the 6 largest banks to help rein in excess liquidity. While we’re on China and the ‘currency wars’ etc I heard the Governor of the BoE say the most sensible thing I’ve heard him say in a while. He suggested that China can’t rebalance its economy in a couple of years. As far as I can tell this is the sticking point. China is actually revaluing the Yuan and while I haven’t seen the US publically declare how much of an appreciation they want, I’ve got no doubt, and history suggests, they want it to be radical. The question for the global economy is whether this is a reasonable expectation.
Moving on, and despite USD bouncing, commodities had a mixed session, with crude down 0.8% to $82.00, copper was up smalls and gold was basically unchanged at $1351. Then to equities; they closed basically flat in the US after a decent session in Europe (+0.3 to +0.4%). The S&P500 was down 0.01% (1165), the Dow was up 0.02% (11008), while the Nasdaq finished up 0.02% as well (2402). By sector there was no major departure from zero. Telco’s and energy were up smalls and industrials and basic materials were down smalls. For Oz, the SPI was up 0.01% (4718).
As mentioned US bond markets were closed and there wasn’t a lot of action elsewhere. Aussie futures ended unchanged (3s at 95.09 and 10s at 94.96) on a 3 to 4 tick range.
So that’s about it. No real data to speak of. To the day ahead and at 1130 we get NAB’s September business survey. No one formally forecasts this series, but I would be expecting a bounce in confidence given the pick up in the news flow and share market rally. Tonight, watch out for UK CPI, the FOMC minutes and a speech from the Fed’s resident hawk – Hoenig.
The Reserve Bank of Australia has expressed guarded optimism for the future of Australian property financing in the midst of the continued global tightening of credit availability.
In his speech on Friday to the Queensland division of the Property Council of Australia, the RBA’s Deputy Governor Ric Battelino suggested that the home and commercial property finance markets show signs of life despite an overall slowing of credit growth.
Battelino stated that the Australian economy is growing around trend, while inflation remains within the RBA’s target range. “This is a comfortable position to be in,” Battelino said.
But in spite of the overall health of the economy, borrowers are still displaying caution, with credit growing at a moderate 7% over the past year and household savings on the rise. “All this is consistent with households taking a more cautious approach to their finances,” Battelino said.
According to Battelino, most of the growth in credit since 2005 has been due to households borrowing for housing, while credit card debt, personal loans and margin loans have remained fairly flat.
Addressing the home loan market, Battelino indicated the weakening of other areas of borrowing is not cause for concern for the RBA given the relative health of housing lending. “The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt,” he said. “From the Reserve Bank’s perspective, this seems to be a satisfactory state of affairs.”