The Chicago purchasing managers index for December was revised down from
68.6 to 66.8, but this is still well up on the 61.9 reading in November.
The US Federal Reserve has unveiled record net income of US$80.9 billion
from securities trading in 2010. The Federal Reserve will remit US$78.4
billion of the income to Treasury and the remittance is up $31 billion on
a year ago.
Atlanta Federal Reserve President Dennis Lockhart has expressed optimism
about the economic outlook, saying that the “economy seems to have gained
durable momentum as we begin 2011.”
European shares fell on Monday on investor caution ahead of debt auctions
by Portugal, Spain and Italy in coming days. In corporate news, US
chemicals group Du Pont will buy Danish food ingredients company Danisco
for US$5.8 billion. The FTSEurofirst index fell by 1.0pct, with the UK
FTSE lower by 0.5pct while the German Dax lost 1.3pct.
US blue-chip shares fell on investor caution ahead of the start of
earnings season. In corporate news Duke Energy will buy Progress Energy
for US$13.7 billion to create the largest utility in the US. Shares in
Sara Lee rose 3.6pct on speculation that a group of private equity firms
is interested in a buyout of the company. With an hour of trade to go,
the Dow Jones index was lower by 34pts or 0.3pct, the S&P 500 down 0.1pct
but the Nasdaq was up by 3.5pts or 0.1pct.
US treasuries rose on Monday (yields lower) after the Federal Reserve
purchased US$7.79 billion in debt due between 2018 and 2020. US 2yr yields
fell by 3pts to 0.58pct and US 10yr yields fell 2pts to 3.30pct.
The US dollar was again mixed against major currencies on Monday. The
Euro rose from lows near US$1.2875 to US$1.2965, heading into the US close
near US$1.2950. The Aussie dollar traded between US98.80c to US99.70c,
and was near US99.55c in late US trade. And the Japanese yen lifted from
near 83.25 yen per US dollar to JPY82.65, and was near JPY82.75 in late US
US crude oil prices rose on Monday after the Trans Alaska Pipeline was
closed due to a leakage at a pump station booster. The pipeline carries
around 12pct of domestic crude output. The Nymex crude oil contract fell
by US$1.22 or 1.4pct to US$89.25 a barrel. Brent crude rose by US$1.96 or
2.1pct to US$95.29 a barrel.
Base metal prices again eased on the London Metal Exchange on Monday.
Metals lost between 1.1-2.8pct with copper faring best and zinc down the
most. But the gold price rose modestly as safe haven demand returned with
the Comex gold futures price higher by US$4.00 an ounce to US$1,372.90.
Ahead: In Australia, international trade figures are released. In the US
data on wholesale inventories is due together with weekly data on chain
Outlook: Shares set to open higher after firm offshore leads December 30, 2010 08:59 AM
The Australian share market is expected to open higher today after receiving a strong lead from Wall Street and higher commodity prices. US stocks advanced overnight as investors remain optimistic about the prospects for equities next year. At closing bell, all the indices were higher as traders look to finish the year with a happy ending.
On Wednesday, the Dow Jones Industrial Average, closed 10 points higher to 11,585. S&P500 is up 1 point to 1,260 and the NASDAQ is up 4 points to 2,667.
European stocks were mixed: London’s FTSE was down 13, Paris is up 32 and Frankfurt is up 23.
To Asian markets, stocks were higher: Hong Kong’s Hang Seng was up 348, Tokyo’s Nikkei was up 52 points and China’s Shanghai Composite up 19 points.
The Australian share market finished lower on Wednesday. The S&P/ASX 200 Index dropped 2 points to close at 4,775 and on the futures market the SPI is down 1 point.
Currencies: The Aussie Dollar at 7:30am was buying $US1.018, 65.7 Pence Sterling, 83.17 Yen and 77 Euro cents.
Company news: Yesterday, shares in Rio Tinto Ltd (ASX:RIO) closed 1.02 per cent lower at $85.48. Rio Tinto has declared a force majeure on coal sales contracts from mines in which it has a majority interest, saying heavy rains in Queensland has affected its operations. The global miner says the monsoonal rains have cut access roads and rail networks, adversely impacting mining operations. Some of the affected mines include Hail Creek, Kestrel and Clermont, all located in Queensland’s Bowen Basin. Rio says it is not yet able to assess the full impact the rains have had on coal mining and transportation lines. For the year ended 30 June 2010, Rio reported a net profit of $7.3 billion.
On Wednesday, shares in Kangaroo Resources Ltd (ASX:KRL) closed 18.42 per cent higher at $0.225. Kangaroo Resources has bought a 99 per cent stake in a large thermal coal project in Indonesia. The company bought the stake in the Pakar thermal coal project located in East Kalimantan from PT Bayan Resources in a scrip deal valued at $277 million. Following the completion of the deal, Bayan will emerge with a 57 per cent stake in Kangaroo Resources. The agreement with Bayan is subject to due diligence which will be carried out over the next 30 days. For the year ended 30 June 2010, Kangaroo Resources reported a net loss of $45 million.
Ex-dividends: There are no companies going ex-dividend today but one company going ex-dividend tomorrow is Clime Capital.
Commodities: Gold is up $7.90 to $US1,413 an ounce for the February contract on Comex, silver is up $0.38 at $30.70 for March and copper is down $0.02 to $4.31 a pound and oil is down $0.37 at $US91.12 a barrel for February light crude in New York.
Before getting into the night’s events it’s worth having a quick look at the RBA’s minutes yesterday. Recall that at the time of the December rates decision, the Bank suggested that “this setting of monetary policy [w]as appropriate for the economic outlook.” The neutrality of that statement struck me at the time and I was genuinely surprised by the Bank’s tone. What I didn’t know at the time was the extent to which European debt concerns were weighing on the board. Sure they mentioned it in the press release, but it’s obviously very difficult to get a sense of weight. Turns out it was front and centre in the minutes.
“Members noted that the deterioration in the situation in Europe over the past month had increased the downside risks to the global economy. How this would ultimately play out, and the implications for Australia , were difficult to predict. It was possible that conditions could settle down, as they had after the episode of financial instability in May. Alternatively, an escalation of the current problems was not out of the question. If this prompted a fresh retreat from risk-taking in global financial markets, it would probably have more impact on Australia than any trade effect. “
The other issue of course is the Bank’s view that “Household consumption and borrowing, however, remained restrained despite high levels of confidence, and the saving rate had increased noticeably over the past few years. This restraint, if it continued, would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build.”
Now as I pointed out at the time, whether you think the RBA hikes again in the 1H11 comes down to how long lasting you think some of these influences will be, i.e. whether you think a) Europe fundamentally has a crisis and b) whether you think consumer caution is the new normal. Regular readers will know my views on both of these issues, but to recap briefly, I think concerns in Europe have morphed into an irrational self-driven hysteria, and it is solely this hysteria which sustains the ‘crisis’. Secondly, I don’t think consumers are being cautious and certainly the weight of reliable evidence would support that view.
The important point for policy is that, in my opinion, both of these influences are temporary. Even if you believe that consumers are being cautious there is nothing to say that will continue when savings are so high and jobs growth so strong (something the RBA acknowledges). That is why I continue to expect at least one rate hike in 1H11 and probably two. Certainly I’ll be going into more detail in 2011 and we have to acknowledge that things are in a state of flux. But suffice to say that I think there is a limit to how long hysteria can feed on itself. Without an actual default etc the crisis will resolve itself I suspect. I mean it’s pretty revealing that, for all the talk, for all the negative hype, US and European stocks are up about 12% for the year – more like 20% in the case of the Dax. Compare that to Aussie stocks which are up, what, 3% y/y or something? More on that next year though.
As for events last night, well risk was put on now that tensions on the North Koran Peninsula seem to have subsided (for now) and stocks in Europe had a particularly strong session, the major indices rising between 0.9 and 1%. Now a big part of that is the commodity story and certainly miners had a very strong session in the UK , up about 3% as Dr copper hit a new record – up 1.7% in NY so far (crude was otherwise 0.4% higher at $89.78) and gold was up smalls to $1387. Gains were broader than that though and this reflects the fact that the underlying global economy is in pretty good shape.
As I write, about an hour to go, US stocks were underperforming Europe but not doing too badly. The S&P500 was up 0.6% (1253), the Dow was 45pts higher at (11523) and the Nasdaq was 0.7% higher at 2667. At the time of writing, financials, basic materials and tech stocks were the main outperformer with consumer goods, health care and utilities lagging. For Oz, the SPI is currently up only 0.3% to 4780.
Debt markets didn’t do much and even with the NY Fed buying over $9bn in treasuries not much of a bid developed. At the time of writing the major t.notes were little changed from 1630 with the 10yr, 5yr and 2yr notes yielding 0.61%, 1.96% and 3.32% respectively. Aussie futures in turn did little on a 4-5 tick range. 3s sit at 94.69 and 10s at 94.39, both little changed.
Finally in FX land, Euro and Sterling lost about 70pips each to be at 1.3097 and 1.5471 while AUD is unchanged at 0.9964. JPY was also little changed at 83.73.
On the data front, things look good with both US and Canadian consumers out spending big. Unlike their cousins in Australia and NZ who, with much lower unemployment rates can’t muster the cash apparently. But anyway, US chain store sales are up about 4%y/y according to two sources which, following strong sales in November is a great outcome. Q4 consumption is looking very solid indeed. Then in Canada , retail sales were up 0.8% in October, which was stronger than the 0.5% forecast and up from 0.4% in September.
News was otherwise light and unimportant. Moody’s is threatening to downgrade Portugal’s rating further, citing umm, the rising cost of debt, which of course is why you would downgrade them I suppose in this fantasy world that we live in – because that will lower their cost of funding. Thankfully there was little market reaction to that announcement. Finally the Fed extended swap lines with other central banks to August 2011. They were set to expire in January. Note this doesn’t represent a mad rush for dollars. This is impossible. It’s like saying there is a shortage of dirt in the world.
Looking to the day ahead, there is nothing for Oz really but across the Tasman the Kiwi release the Q3 balance of payments. Tonight keep an eye on US and UK Q3 GDP revisions, US existing home sales and the BoE’s minutes.
Have a great day,
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…
Risk was back on in volume last night and mostly because of the decent economic dataflow. It wasn’t all great mind you: new home sales fell 8% in October, which was much weaker than expected (1.6%) although it does follow an upwardly revised 12% gain in September. In any case, mortgage applications for new purchases surged by 14% last week which points to a turn around or at the very least a stabilisation. Then durable goods fell 3.3% in October and while all the headlines are telling you how bad this is, it kinda isn’t. There were some big swings in volatile items like aircraft (-11%) and defence orders (down 21%) and if you strip that stuff out; orders were still weaker but only 0.8% weaker (and after decent gains in the 2 months prior).
On the flip side it looks like things in the consumer space continue to improve and indeed are doing much better this month. In particular, new jobless claims fell to 407k in the week to November 20, from 441k, which is the lowest number of new claims in over 2-yrs. Added to that, continuing claims fell 142k to 4.18m (also the lowest in about 2-yrs). While there will be no shortage people to tell you this number is anomalous, the US department of labour haven’t cited any unusual factors affecting the data – so mayhap it is and mayhap it ain’t. Time will tell, but the downtrend is clear and consistent with the decent growth we have seen in private sector payrolls this year (1.1m jobs so far).
The good news continued with a 0.5% rise in personal spending (4th consecutive month of decent growth) and a 0.4% gain in income (all for October). With this dataflow you can’t help but wonder how the Fed managed to revise down their forecasts. It’s pretty clear the US economy is on a solid path to recovery and there can be no credible denial of that. Indeed I don’t know too many forecasters, who, in the face of stronger data and additional stimulus, manage to find slower growth. But it’s a crazy world I guess, full of crazy people.
Maybe that’s why treasury yields continue to rise. Volumes were pretty decent last night and while that’s mainly because of the better jobs and spending data, we also saw weak demand at the $29bn 7yr note auction. Cover at 2.63 was well down on the 3.06 and 3.04 ratio we saw in October and September and is the lowest ratio since March. Similarly indirect bidders took 42% of the issue which is lower than the 50% they had been taking. So at the time of writing, yields on the major t.notes had spiked higher – 7bp on the 2s (0.53%), 11bp on the 5s (1.56%) and 12bp on the 10s (2.91%), which is particularly noteworthy given the core PCE moderated to 0.9%y/y in October from 1.2% (headline at 1.3%y/y from 1.4%). The market is telling you that deflation isn’t a worry. So I have to say it – Qe2 has failed. Aussie futures bounced around on an 8-9 tick range and currently sit 4-7 ticks lower on the 3s (94.79) and 10s (94.46).
Equities then found a decent bid and at the time of writing, had offset most of the prior session’s losses. In Europe, stocks rose between 1% and 1.8% on the major indices and in the US, the S&P500 is currently up 1.4% (1197), the Dow is 143pts higher (11188) and the Nasdaq is 1.8% higher at 2540. While all sectors pushed higher on the S&P, industrials, technology and energy stocks outperformed. Other than that, the SPI was up 0.85% (4624).
Looking into the FX and commodity space, the USD was generally stronger with the dollar index up 0.4% (from 1630) with euro off 85pips, Sterling down 65pips (1.5762) and Yen up to 83.58 from 83.23. That said, Aud is a little firmer (+27pips to 0.9817). Noting the stronger USD, the surge in commodity prices was particularly impressive – crude rose 3.3% ($83.8), copper is up 1.4% although gold was down smalls ($1373).
In other news and data the Germans are getting more confident by the day and the IFO business climate index rose to 109.3 in November from 107.7 which is a record high. Both the current assessment index and the expectation component rose in the month, which stands in stark contrast to widely held expectations for a material slowing in 2H10 growth. Still in Europe , industrial orders fell 3.8% in September not quite offsetting a 5.1% rise in the month prior. Then in the UK , Q3 growth was confirmed at a strong 0.8% quarterly rate. Lastly, Michigan uni revised its November estimate of consumer confidence up to 71.6 from 69.3. I think that’s most if it. Ireland announced a 4yr austerity plan of spending cuts etc etc over the next 4yrs, although bond yields pushed higher (40bp on the 2yr to 5.72%) and 45bp on the 10yr to 8.86%). That said the 10yr bund sold off aggressively also and the 10yr yield spiked to 2.71% from 2.55% so we have to keep it in context.
With the Thanksgiving Holiday in the US there isn’t much data out and markets will be closed tonight. Indeed there isn’t much out in our region either. Japanese trade data and for Australia , private capex at 1130. Yesterday’s construction work done figure was weak but most of the weakness was concentrated in residential and public construction (after considerable strength). The main implication is that my GDP forecast is quite a bit weaker (0.2% from 0.7%) so far, but we have a few indicators to go yet so this will probably change. On the flip side there is nothing in this data that suggests the mining led business investment boom is at risk. This implies that the weakness we are seeing can be put down to volatility and certainly there is nothing to be overly worried about.
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…
Aussie shares have nudged up to be slightly higher at noon. Following Wall St slumping on inflation concerns in China and renewed fears over European debt. Locally BHP Billiton Ltd (ASX:BHP) has lifted after news the global miner will withdraw from its PotashCorp bid and launch a $US4.2 billion share buyback. Commonwealth Bank of Australia (ASX:CBA) is also higher, the bank today announcing a first quarter cash profit of $1.6 billion.
The S&P/ASX200 index is up 11 points at 4,704 and on the futures market, the SPI200 is up 16.
To company news: James Hardie Industries SE (ASX:JHX) has more than tripled its second half net loss, moving from a loss of $US97.5m last year to a loss of $US318.8 million. The result for the six months to 30 September was negatively impacted by a tax charge of $US345.2 million, following James Hardie losing a court appeal on a tax ruling. The building materials manufacturer warns that the operating environment in the US residential housing market remains challenging and the outlook uncertain. James Hardie will not be paying a dividend in the 2011 financial year. Shares in James Hardie Industries SE have slipped 1.42% to be $5.57 at noon.
Elders Ltd (ASX:ELD) has narrowed its net loss for the year to 30 September, rising from a loss of $432.7 million last year to a loss of $217.6 million in 2010. The result reflects $166.5 million of non-recurring items concerning impairments and write-downs connected to Elders’ Forestry business. The rural services provider says the earnings improvement was in line with guidance and achieved through a reduction in net underlying interest. Elders confirms it is in on track for a lift in performance, forecasting net profit of between $15 million to $30 million in the year to 30 September 2011. Shares in Elders are 1.61% higher at $0.63 at midday.
Market indices: The best performing sector at noon is Industrials, with the index up 42 points to 3,768. Shares in Brambles are up 5.82% at $6.91. Shares in Hastie Group and Ausenco are also higher. The worst performing sector at midday is Financials Excluding Real Estate Investment Trusts with the index flat at 839. Commonwealth Property Office Fund is down 5.85% at $0.845. Charter Hall Retail and Westfield Group have also dropped at noon.
To New Zealand: The NZSX50 is down 1 point. Taking a look at the top 4 stocks by turnover, Telecom of New Zealand is at the top of the list with stock up 1.38% at $2.21 followed by; Guinness Peat Group, Fisher and Paykel Healthcare and Fletcher Building.
To gold and the dollar: Gold is trading at $US1375 an ounce and the Aussie dollar is buying $US98.95 cents.
Phew! AUD is safely back under parity, for now, following a broad bid for greenbacks last night. The Dollar index is up 0.9% from 1630, perhaps following comments from US Treasury Secretary, Tim Geithner. He said, on CNBC, that the US is not trying to devalue the dollar and would “never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy”. I’ve heard that CNBC subsequently launched legal proceedings against Geithner, after his nose impaled a camera man.
Remember that Geithner/Bernanke/Obama don’t believe the Fed’s monetary policy is having a material impact on the USD, or – get this – commodity prices. I am being serious. This is their view. The rise in gold is a ‘puzzle’ to Bernanke – I #$%t you not. This is the *&#$%^# Chairman of the FOMC and the rise in gold is a #$%^&*# puzzle! I know, I know, I shouldn’t be shocked; they also don’t understand the Fed’s role in causing the GFC. For that they blame high savings in Asia, which is obviously moronic (come off it, it is, be real for a minute), but that is their view.
Now Geithner wasn’t just making idle chatter. He was fired up by comments from Ex-Fed Chairman Greenspan (The maestro), who said, yesterday, that the US was indeed deliberately weakening the dollar. Greenspan joins a long list of notable policy makers and economists who are concerned about US economic policy. As I have stated many times before, US economic policy stands out as the single biggest threat to global growth and the real, credible, fear is that protectionist measures ramp up in response. It’s already happening.
Is it any wonder then, that the G20 doesn’t seem to be getting anywhere. On current reports, some participants have said that progress is underwhelming their already very low expectations. God help us. No seriously, please God help us. We need a coalition of the willing to exact regime change in the US I reckon. They’ve gone rogue.
Anyhoo, at the time of writing, AUD was down about 70pips (from 1630) to 0.9977. Sterling was down 25pips to 1.6116 and Yen now sits at 82.5 from 82.25. The real underperformer was euro; down 130pips to 1.3658 which is the lowest level in over a month.
Now the catalyst for the euro’s underperformance can be found in the replay of European debt fears. We saw episode 10 last night – rumours – and the rumours are that Ireland sought financial aid from Europe and the IMF. Now because we’ve all see this episode before we know how it ends. Said rumours were denied by the EU and IMF, but that didn’t stop spreads flying out to a new record high. Never let facts get in the way of a good spread widening. That said, our European team report a distinct lack of liquidity, so a couple of punters selling bonds doesn’t really tell us much about the market. What’s to say a couple of buyers (literally a couple) won’t emerge to take yields straight back down?
Bonds sold off across the European periphery, especially Greek and Irish 2yrs, with yields up 60bp to 11.3% and 53bp to 6.69% respectively. The worry is that yields in Spain and Italy are on the March now - up between 10-14bp across the curve.
That said, yields across the global seem to be on the rise any way and about the only rational observation you can make, is that inflation expectations are swelling. In some cases bond moves are marginal – 10yr bund yields up a couple of bp, but in some cases not, with 10yr gilts up 20bp or so over the week. I mean check out euro dollars. They’ve dropped off about 25 ticks at the back – over the last week alone (10 ticks last night). Moreover, and as mentioned the other day, inflation break evens are on the rise and of course, commodity prices are surging.
Copper, Dr copper my friends, hit a record high yesterday and isn’t too far off that now (down 0.7% from 1630). Then gold is still hovering around record highs (it’s such a puzzling puzzle) but flat from yesterday ($1407). Crude for its part dipped a bit (0.6% from 1630) but remains elevated at $87.75.
As for equities, they tended to weaken around the globe. In Europe, stocks were between -0.03% and +0.05%, but they were a tad weaker across the Atlantic. As I write (50mins to go) the S&P500 is down 0.4% (1213) with tech, telcos (on Cisco’s poor profit projections) and financials the main deadweight’s. Basic materials and energy managed to put in a reasonable performance and are currently well into positive territory. Otherwise the Dow is off 74pts to (11282) the Nasdaq is down 0.9% (2556) and the SPI is 0.2% weaker (4732).
Don’t forget it was Veteran’s day in the US so Treasuries didn’t trade and there was no data to speak of.
Today keep an eye out on the NZ Real Estate Institute’s house price series (8am) and Indian Industrial production (due out at some stage). Then German and Euro zone GDP (Q3 prelim) is out alongside industrial production and for the US, check out the Uni of Michigan’s preliminary November confidence estimate.
Is it even surprising anymore? I mean really, be serious with me for one minute. Global manufacturing data released over the last 24hrs has ‘surprised’ on the upside – again – and shows activity accelerated at a decent clip. It started in our zone – the China PMI rising to 54.7 from 53.8 and an expectation of 53.8. After that the good news kept rolling in – the UK manufacturing PMI rose to 54.9 from 53.5 and in the US, the ISM was much better than expected, rising to 56.9 from 54.4. In particular, production was strong, rising 6pts, new orders surged 8pts and prices and employment both improved in the month (to 71 and 57.7). The thing is, this is all Q4 data – October specifically – and while it’s very days, the numbers are telling us that global growth accelerated in Q4 after only a modest slowing in Q3.
Remember all the claptrap about how we’d see a significant deterioration in 2H10? Well yet again, all the talk has come to nothing and in fact the global economic recovery is still looking very healthy. Ironically, the key threat to growth comes from policy makers, especially those at the Fed and despite the broad spread of stronger-than-expected data, the Fed still looks set to print more money. In a sane world this wouldn’t be happening. But we’re not in a sane world. The Fed has gone rogue and US monetary policy is focussed on monetising debt and forcing a rebalancing of global growth. Notice the chain reaction. By pure coincidence the BoJ has pulled forward its policy meeting, timing it just after the Fed and there is a wide held view that if the Fed pulls the trigger, so too will the BoJ (and perhaps even the BoE). Capital controls are increasingly being imposed throughout the emerging market world and there are threats of more to come. Well done Ben, well done indeed.
The mismatch between economic fundamentals and economic policy is causing a little bit of confusion for punters however and price action last night was whippy. Equities initially spiked higher after the ISM survey, hitting a high of 1195 (+0.9%) on the S&P. Stocks soon went offered though, hitting a low of 1177 (-0.7%) just after 5am (Oz time). At the close, the S&P500 was 0.1% higher (1184) with technology, telecommunications and basic materials outperforming. On the downside were utilities, consumer goods and financials. Otherwise, the Dow rose 6pts (11124) and the Nasdaq falling 0.1% (2504).
Rates ended little changed; the treasury curve not doing much as the 2yr yield held steady at 0.34% while the 10yr rose 1bp to 2.63%. Otherwise the 5yr was down about 2bp to 1.17%. Aussie futures for their part traded on a 3 to 7 tick range on the 3s (down 1 tick to 95.06) and 10s (up about 2 ticks to 94.76).
As for FX, we saw broad based USD strength with EUR down a big figure to 1.3884, Sterling and OZ are off about 30pips to 1.6033 and 0.9856 respectively, while Yen sits at 80.59, broadly unchanged from yesterday afternoon. Commodities then were mixed with gold off about $11 to $1351, although copper rose 1.5% in New York and crude bounced 1.8% ($82.87).
There were a few other bits and pieces of note. In the US, construction spending was stronger than expected, rising 0.5% in September compared to expectations for a 0.5% fall. With past revisions the level of construction is probably unchanged though. Personal spending then rose 0.2% in September after a 0.5% increase the month prior, while income fell 0.1% after a 0.4% rise the month prior. Both spending and incomes growth are healthy nevertheless. Finally the PCE deflator was steady at 1.4%y/y while the core PCE dipped to 1.2%y/y from 1.3%y/y, dispelling the myth that deflation is a threat.
To the day ahead we get the RBA at 1430 and for what it’s worth (and no doubt it will be a close one) I reckon they’ll pop off another 25bp. They’ve learnt what they needed to over the last month. Granted, Q3 CPI was softer than expected but in reality it wasn’t that much softer, and underlying inflation likely rose 0.7%q/q (or just below) and 2.6%y/y. Consequently the result is unlikely to change forecasts materially, and so any suggestion a rate hike today is a difficult sell is simply ludicrous.
Having said that, I can appreciate there is no screaming urgency to hike at this meeting either and so it would be reasonable to wait a bit – flip a coin. On my read of the situation, however, urgency isn’t a necessary condition. In fact you don’t want to get to that point. We know rates are going higher, the domestic economy is healthy, the global economy is recovering (accelerating) and inflation is elevated. With that in mind the decision seems clear to me. My read of the RBA’s press releases and statements, is that at each meeting, the Board asks itself one question. Why not again? What is stopping us moving this month given our medium term strategy of getting rates higher? Last month the answer was pretty clear – global uncertainties were high and there was a strong run of pivotal, potentially forecast changing data, soon to come out.
Over the last month we have learnt that domestic inflation is still on track to pick up over the medium term, we’ve learnt that global growth uncertainties have subsided (the recovery is still on track) and we’ve even seen that domestic growth is likely still around trend. It’s not that this path wasn’t expected or is a surprise, it was expected. It’s just that the downside risks that were material a month or so ago seem less so now. Moreover it’s not likely that any information we get over the next month could change that assessment. Fair to say there is a lot of GDP data in the run up to the December meeting, but then again there’s not too much controversy over the domestic outlook. In any case, labour force figures are already telling us what GDP did in the quarter. 100k jobs were created in Q3 which is a step up from the 86 or so created in Q2. Needless to say with IBs pricing one rate hike only to June 2011 I reckon there is a bit of money to be made being short. Even Nov’s look attractive with 5pts on the upside and 20 on the up. We’ll find out at 1430 in any case. Just note that prior to the RBA we get NZ labour costs and the quarterly employment survey (0845), but there is not a lot else otherwise.
So You’d Think with all that done we could sit back, put our feet up and relax for the day. But you’d be wrong. It’s not the Precedence and at 1500 the nation stops for the Melbourne Cup. I know, I know, it’s Shocking that we should even have to come to work on this, the most sacred of sporting days. But I’ve already ranted at length about how this day should be a national public holiday and so, dear reader, I’ll shall spare you that today. I wouldn’t want to come across as being overly Descarado after all. One, two and three. You heard it here first.
Have a great day and good luck punting…
When I first saw those CPI numbers I was inclined to think the RBA would hold steady at this November meeting (Tuesday 1430). Headline came in as expected, but the trim and weighted median were certainly much weaker, implying underlying inflation slipped from 2.7%y/y to 2.5%y/y in Q3. With core inflation well within the band, all is good and well right?
The issue is complicated by the fact that the RBA looks at a broader set of underlying measures and when you consider some of them, core inflation doesn’t look so sweet. It’s quite possible that core inflation isn’t as soft as suggested by the two measures mentioned above and that underlying inflation actually remains around 2.7% in annual terms (or just below at 2.6%). It’s just too hard to know with any degree of confidence and in part, that’s why I don’t think these numbers really change anything. I still reckon the RBA will hike at this meeting.
Remember, RBA statements suggest there are 3 issues under consideration: 1) Whether Aussie growth is around trend or not; 2) whether inflation is close to target or moderating etc and; 3) whether global uncertainties are being resolved (or whether the global outlook was improving etc).
Naturally, the month to month decision is based on the interplay between these three issues. On the domestic growth front we haven’t seen anything that will likely change the view the Aussie economy is growing around trend. Similarly and as mentioned, the Q3 CPI data probably won’t change the RBA’s medium term inflation assessment (for core to edged back up to the top of the band by 2012). It’s not so much that these inflation figures are a smoking gun or anything, far from it. Yet when I think about it, they’re just not ‘good’ enough to change the notion that we are going into this recovery with an already elevated inflation rate. At best we might be able to say the trough will be a little lower, at best though and even this isn’t clear. So when you sit back and think about whether the Q3 numbers materially impact the outlook, the answer is probably no.
Globally, we’ve obviously learnt a lot since the October meeting when the RBA Board wanted a little more time to assess global uncertainties. On any reasonable assessment, global growth concerns have diminished somewhat since that meeting. Indeed we have witnessed a barrage of data that, by and large, show a substantial decline in prospects for a double dip recession in the US. Moreover, data in Europe and Asia generally show still firm, albeit slower, growth outcomes. At the very least, there is nothing to suggest some of the more pessimistic scenarios that were being bandied around are in any way shape or form close to becoming a reality.
So the question is, what tactical obstacles to a rate hike remain? For mine the answer is none. The RBA held steady at the October meeting to assess the CPI and the barrage of global growth data. Having seen all that flow we know that 1) Aussie growth is still at trend; 2) medium term inflation is still more likely to pick-up and 3) the global backdrop looks good (bad stuff didn’t eventuate). True to say that we get a lot of Q3 growth data in the lead up to the December meeting and perhaps the Board will want to see this data. For mine though there was never really any major controversy as to the domestic growth data and so there is nothing really to wait for – not to mention the fact that you could make that argument every month. Nope, for mine, the last month was pivotal in assessing some of the downside global risks – it’s clear that the worst didn’t eventuate and so the RBA will resume tightening.
The other big event this week is the Fed and weighing recent fed rhetoric, it seems clear they’ll print more money after the November 2-3 meeting. As to the amount, well $100bn per month seems to be the consensus although it’s unclear whether they’ll limit the initial move to a 3 month program or a 6 month program or whatever. I don’t have a strong view on this as I don’t think the decision is based on US economic prospects (which remain good). I think it is quite obvious, given the better-than-expected dataflow, that the decision to print is political (which by the by is why I reckon the RBA will ignore it to some extent) and more reflects an attempt by the US to force a global rebalancing. The economic case to print is non-existent in my opinion and this action will do little to lift economic growth. Treasury yields may or may not go lower and I have seen very compelling arguments on both sides as to why yields would go up or down. Market psychology is all important here, but increasingly Fed actions are being viewed with contempt so they are playing a very dangerous game. Not one punter I’ve spoken to, domestically or abroad, has a positive view on Qe2 and I’ve seen very little positive commentary about it. The Fed risks a lot here.
The RBA and the Fed are pretty much the main events but don’t forget the US mid-term elections and of course there is a barrage of domestic and global data. In Australia we get house prices today at 1130 (mkt 0.0%) and TD’s inflation gauge at 1030.The RBA’s commodity price index is also out today at around 1630. Building approvals are due Wednesday (1130) with the market again looking for a flat outcome. Retail sales (mkt and me at +0.5%) and trade follow on Thursday and then we get the RBA’s quarterly Statement on Monetary Policy on Friday.
US data includes the ISM index tonight alongside personal income and spending. The other big data release is then payrolls on Friday (mkt at +60k). Otherwise check out PMI’s from China and the Euro zone and the ECB, BoE and BoJ meetings (calendar attached).