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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.
Well it was bound to happen. The US has suffered a ratings downgrade to A+ from AA. Hey whoa! whoa big fella, easy, easy. Not from Moody’s or S&P or even Fitch. But from Dagong Global Credit Rating Co. – one of China’s main ratings agencies and under the circumstances, one of the more credible ones. You may, as some have said, think that the move was politically motivated – but is that really a reasonable accusation? I mean the US IS monetising debt, they are printing money and eroding the value of the dollar. As Dagong rightly points out – this isn’t good for creditors. It’s ridiculous to argue Dagong were politically motivated when you think about it. I think a stronger case can be made that the ‘mainstream’ (US based) credit ratings agencies are politically motivated in not downgrading the US. Where were those guys before the GFC huh? Where?
Ok so markets didn’t really move on the announcement but you simply cannot fault their logic with a straight face. In any case, you would probably be in a minority if you tried. Gold is hovering around records, breakeven inflation rates have spiked higher and at the moment, US treasury yields are on the rise. The market is telling you exactly what they think Qe2 will do and if a Reuters survey of 200 economists is any guide, it ain’t lift growth or create jobs. The survey found that US growth forecasts have been left unchanged post the FOMC decision – ie Qe2 will not be effective in lifting growth or jobs. That said some did suggest it was an insurance policy, though against what is not clear. As we know, domestic demand growth is above trend and there are no signs of deflation. It begs the question; where is the insurance policy against surging asset prices, currency tensions and generalised global instability. No, the ‘insurance’ argument doesn’t make any sense.
Anyways, US Treasury yields were higher last night and had been rising steadily throughout the session when a mixed $24bn 10yr auction saw bonds sell off further. The notes were awarded at 2.636% compared to 2.475% last month and the bid to cover was down sharply as well, to 2.8 from 2.99. Indirect bidders took a record 56% of the auction nevertheless. With 40mins to go the yield on the 2yr is up 5bp to 0.44%, the 5yr yield is 14bp higher at 1.25% and the 10yr is up 12bp to 2.66%. So over the last week, the 10yr yield is up 20bp, the 5yr is up 25bp and the 2yr is up 10bp. Aussie futures for their part bounced around on an 11-13 tick range with 3s down 5ticks (94.85) and 10s down 8 ticks (94.61).
Outside of that, last night’s session wasn’t that exciting – especially in terms of news or dataflow, not that things will likely improve tonight or tomorrow night. We’re in a bit of a dead zone at the mo’. The major US data last night was wholesale inventories and they rose 1.5% in September – another strong gain which suggests inventories may add even more to Q3 GDP. Sales weren’t too bad either, rising by 0.4%.
With no real heavy hitting news, US stocks were weaker and with 40mins to go, the S&P500 is down 0.7% (1216), the Dow is off 52pts to 11353, while the Nasdaq is down 0.5% (2566). Financials, basic materials and industrials are the main underperformers, while energy stocks are just in the black. For Oz, the SPI is 0.2% higher at 4760, seemingly following European stocks higher (Dax +0.6%, FTSE +0.4%).
On the FX front we saw some big moves on Sterling – down a big figure to 1.6032 – although moves elsewhere were much more modest. On the back of generalised USD buying, AUD was 30pips lower at 1.0076, Euro about the same at 1.3827, while Yen was up to 81.6 from 80.98.
Finally in the commodity space we saw gold down $7 to $1402, crude fell 0.5% to $86.63 and copper rose 1.6%.
There were few other bits and pieces. UK industrial production rose 0.4% in September after a 0.4% rise in the month prior, to be 3.8% higher annually. German CPI was confirmed at 1.3%y/y in October but that’s about it.
So our day kicks off with the NZ stability report followed by RBNZ Gov Bollard’s appearance at a Select Committee on Financial stability at 10am (Oz time). Aussie consumer confidence is then out at 1030 and, while no one really forecasts it, don’t be surprised to see confidence dip. We saw a rate hike in November after all. Its always difficult to gauge underling confidence around rate hikes and as we saw yesterday, business didn’t take speculation over an October rate hike too well (not to mention the higher AUD). Point is, we can’t say with any confidence, that, umm, confidence is actually waning. Business and consumer confidence is very volatile at the moment. Home loans then follow at 1130 with Chinese trade data at some stage.
There is a bit of 2nd tier US data tonight, including mortgage applications, jobless claims and the monthly budget, but other than that the only thing of interest will probably be the BoE’s inflation report.
Well unfortunately, we didn’t get much from IMF meetings held this weekend. The rhetoric was kinda there – finance ministers agreeing to cooperate on exchange rates and to hold further discussions (G20 meetings) in November. Agreement is going to be extremely difficult to achieve in practice though. The IMF and the US take the position that China’s FX reserve accumulation is responsible for global imbalances. Emerging nations for there part suggest that it isn’t the accumulation of FX reserves, but the Fed’s ultra loose monetary policy that is causing problems.
Regular readers will know my view – it is very clearly the Fed. I mean think about it. China didn’t force US consumers to gear up to their eyeballs taking out loans they couldn’t afford – maxing out their credit cards etc. Consequently, China is not responsible for either the GFC or the US trade deficit – for the global imbalances the US keeps going on about. Moreover when other nations intervene in FX markets, they are responding to the depreciation of the USD –caused entirely the Fed’s ultra loose policy and ongoing threats to print more money. They’re not responding to any action that China has taken.
The US doesn’t acknowledge any of this however, so it going to be difficult to discuss anything. In fact many US politicians spend their time ranting on about China – how they undermine US export opportunities and so take American jobs. Of course from their point of view, the yuan is just providing one enormous export subsidy. The fact that Chinese workers get paid about 1/10 of a US worker is apparently irrelevant.
In all of this I haven’t seen a figure the US would be happy with – it’s unclear just how much of a revaluation they want. So since 2005 we’ve seen something like 18%, which obviously hasn’t calmed US fears. Then again can anything assuage US fear? Back in the 80’s, a time when the US was attacking Germany and Japan about the value of their currencies, the US managed to convince the Japanese (the Plaza accord in ‘85) to a 40% appreciation of Yen over a 2 yr period. This by the by was a complete failure of a policy and did little to fix trade imbalances on a sustained basis (in fact the trade balance with both countries continued to deteriorate through the 90’s).
China’s rhetoric to date suggests they will be less amenable to such dramatic action. No doubt the Asian financial crisis of ‘97 is very fresh in their mind and consequently, they want to ensure that the Yuan appreciates only gradually and that they don’t freely float the currency prematurely. As we found out in 1997, the consequences of acting too early can be severe.
There is an important point behind all of this with serious implications for Australia. Namely, the Fed are probably going to print more money. If they can’t get an agreement with other countries to revalue their exchange rates, then they’ll force it upon them. This means the AUD will, in all likelihood, smash though parity. Now we know how this works – a higher AUD means less tourists, it means lower profits for other exporters including our miners etc etc. It means a lower terms of trade. Lower profits mean lower national income; it means smaller budget surpluses; all of which suggests lower economic growth for Australia – and lower inflation.
Magnitudes are obviously very difficult to work out and exchange rate impacts have generally become more muted as they say. Yet they’re not completely irrelevant – especially given the importance of the mining boom to future growth – and if the AUD continues to rise, there will be implications for monetary policy.
At this stage I’m leaving my forecasts as they are, but none of us should make any mistake – things are very fluid. So I’m sticking with 2 rate hikes this year predicated on an elevated Q3 CPI print, solid domestic growth data and a pick up in global growth. If all that happens but AUD is at $1.10 then make that 1 rate hike (maybe). Much depends on the Fed and note that the next meeting (at which they are expected to print) would be the day after the RBA’s meeting (November 5) which will make things very interesting, very close and obviously lifts the bar for a hike.
Leaving that for now and looking to the week ahead – data for Australia is reasonably light although under the circumstances quite important. Home lending data is released today (1130) and for mine this is a key indicator. Expectations are that loans will rise 1% in August (my forecast also). Other than that we get NAB’s business confidence measure (Tuesday, 1130) and Westpac’s consumer confidence update (Wednesday, 1030). Across the Tasman the kiwis put out August retail sales on Thursday (mkt at 0.3% me at 0.5%). For the rest of the region, keep a close eye on Chinese trade data on Wednesday.
US data includes the FOMC minutes (Tues morning), retail sales, CPI, Empire State index, Michigan confidence (all Friday night) and a whole bunch of Fed speakers (including Bernanke on Wednesday). Finally in Europe we get German and UK CPI and Euro zone industrial production. Otherwise check out the attached calendar.
Hope you have a great week…