The RBA will meet tomorrow to discuss Monetary Policy. Expectations are for a pause following a rapid succession of six rate hikes, with a brief pause in the middle, since October last year. The hike's impact are beginning to show up in retails sales figures and Virgin Blue's announcement that they have seen a 'rapid deterioration' in leisure travel is a good indication of the effect on discretionary spending.
The other factor supporting a pause is obviously the continues uncertainty swirling around Europe.
The length of the pause is dependent on a wide range of factors, including Europe and China, but if / when inflation places the RBA 2%-3% target under pressure later in the year they will resume the hikes.
National Accounts figures are also due this week and are likely to show that growth slowed to around 0.6% last quarter from 0.9% in the previous three months.
May 31, 2010
May 26, 2010
Curve
Uncertainty and liquidity worries have continued to place severe pressure on European markets and concerns about developments in the Korean peninsula put severe pressure on those markets yesterday. USA markets were under pressure last night at one point but recovered to largely hold ground.
The volatility has created an interesting dislocate in the yield curve. The 90 day rate and one year rate are now the same with the 120 to 180 day rates all being higher. The drop in the 1 year rate has made AMP's long standing 1 year special at 6.31% look very attractive. It's 147 points over wholesale rates.
The volatility has created an interesting dislocate in the yield curve. The 90 day rate and one year rate are now the same with the 120 to 180 day rates all being higher. The drop in the 1 year rate has made AMP's long standing 1 year special at 6.31% look very attractive. It's 147 points over wholesale rates.
May 21, 2010
Uncertainty
Turmoil continues to rock global markets with uncertainty in Europe causing a flight to quality as fears of financial market paralysis re-emerge. The AUD, despite what we may think, is regarded as a high risk currency. It's fate is in the hands of the global economy - particularly China. If the global economy looks like it might be heading into trouble the rational is to get out of AUD. At 10.30 the AUD / USD was about 82 cents.
The uncertainty surrounding global growth and it's potential impact on our economy is also causing a re-think in interest rate markets. The yield curve has flattened significantly over the last couple of days as a more extended rate hike pause than first thought is priced in. The real impact has been in longer rates where the 5 year swap rate has experienced significant volatility as indicated below:
5/5/10 6.07%
8/5/10 5.65%
13/5/10 5.89%
21/5/10 5.51%
These lower long term rates are making FRNs a much more attractive long term investment if you are looking at this sort of term.
6-month BBSW has dropped 15 points this morning
The uncertainty surrounding global growth and it's potential impact on our economy is also causing a re-think in interest rate markets. The yield curve has flattened significantly over the last couple of days as a more extended rate hike pause than first thought is priced in. The real impact has been in longer rates where the 5 year swap rate has experienced significant volatility as indicated below:
5/5/10 6.07%
8/5/10 5.65%
13/5/10 5.89%
21/5/10 5.51%
These lower long term rates are making FRNs a much more attractive long term investment if you are looking at this sort of term.
6-month BBSW has dropped 15 points this morning
May 20, 2010
Europe & USA
Europe
The Europeans don't seem to be able to get themselves out of trouble. Germany has now placed a ban on shorting euro government bonds and CDS but no other euro zone country seemed to know about it which has created mass uncertainty. Something financial markets never like.
USA
Some good news has come from the FOMC minutes though. The Fed marked up its 2010 real GDP forecasts from 2.8% - 3.5% to 3.2% - 3.7% and lowered its unemployment rate (9.5% - 9.7% to 9.1% - 9.5%) and core PCE (1.1% - 1.7% to 0.9 - 1.2%) forecasts.
The Europeans don't seem to be able to get themselves out of trouble. Germany has now placed a ban on shorting euro government bonds and CDS but no other euro zone country seemed to know about it which has created mass uncertainty. Something financial markets never like.
USA
Some good news has come from the FOMC minutes though. The Fed marked up its 2010 real GDP forecasts from 2.8% - 3.5% to 3.2% - 3.7% and lowered its unemployment rate (9.5% - 9.7% to 9.1% - 9.5%) and core PCE (1.1% - 1.7% to 0.9 - 1.2%) forecasts.
May 19, 2010
RBA Board Meeting Minutes
The RBA has given us a further hint that a pause in the rate hike process is on the way. How long that pause will last is anyone's guess but it's a pretty safe bet that unless Europe collapses and China stops buying our minerals there will be further rate hikes towards the end of the year. I've pasted their conclusions below. If you wish to read the minutes follow this link. RBA Minutes
Members noted that the increases in interest rates to date had been timely. There were some early signs that they were beginning to affect behaviour, with retail sales subdued and housing loan approvals falling noticeably. Nonetheless, the stimulatory effects of the resources boom would be building over the year ahead. Members were conscious of the need for this not to result in a material worsening in the medium-term outlook for inflation. This was weighed against the case that could be made for a pause in the process of normalising interest rates owing to the uncertainty in the euro area. On balance, members judged it to be prudent to undertake some further monetary tightening at this meeting. They noted that, if lenders responded as expected to another rise in the cash rate, interest rates faced by most borrowers would then be at around their average levels over the past decade. Members felt that this would leave monetary policy well placed for the present. The Board therefore supported another rise in the cash rate.
The Decision
The Board decided to raise the cash rate by 0.25 percentage points to 4.5 per cent, effective 5 May.
Members noted that the increases in interest rates to date had been timely. There were some early signs that they were beginning to affect behaviour, with retail sales subdued and housing loan approvals falling noticeably. Nonetheless, the stimulatory effects of the resources boom would be building over the year ahead. Members were conscious of the need for this not to result in a material worsening in the medium-term outlook for inflation. This was weighed against the case that could be made for a pause in the process of normalising interest rates owing to the uncertainty in the euro area. On balance, members judged it to be prudent to undertake some further monetary tightening at this meeting. They noted that, if lenders responded as expected to another rise in the cash rate, interest rates faced by most borrowers would then be at around their average levels over the past decade. Members felt that this would leave monetary policy well placed for the present. The Board therefore supported another rise in the cash rate.
The Decision
The Board decided to raise the cash rate by 0.25 percentage points to 4.5 per cent, effective 5 May.
May 17, 2010
Europe
Issues in Europe continue to keep markets on tender hooks with uncertainty surrounding various countries abilities to 'grow' themselves out of their problems. The new government is also now claiming there are many new debt skeletons falling out of closets so they could be in a worse position than first thought.
May 12, 2010
Rates
Short rates have lifted a little (90 day rate jumped to 4.88% from 4.81% yesterday) which I think is as much a response to the European situation calming as it is to the budget. I still believe a pause in on the cards so don't expect these rates to move too much higher for the moment and in fact over the next few days they're more likely to settle down.
May 11, 2010
Return to Calm
Spreads on Greek bonds came in dramatically last night and it seems that the rescue package has been very well received.
The premium on 10-year government bonds plunged to 387 basis points from as high as 965 for Greece. It fell to 193 basis points from 350 for Portugal and to 97 basis points from 166 for Spain.
The premium on 10-year government bonds plunged to 387 basis points from as high as 965 for Greece. It fell to 193 basis points from 350 for Portugal and to 97 basis points from 166 for Spain.
May 10, 2010
Rescue Package
The 27-nation EU has just agreed to a massive $700b (AUD) rescue package for Greece. Given the muddle the PIIG countries had gotten themselves into they had absolutely no alternative. As a result the longer end of the yield curve has unwound much of the rally experienced on Friday.
May 07, 2010
European Contagion
Worries continue to swirl around the world with a number of European countries experiencing funding pressure. The stockmarket in the US went into free-fall last night being down 1000 points at one point before ending down 347 points. There is some speculation that the sell-off was due to a human or computer error.
In times such as these there is always a flight to quality. As such the AUD has been sold off and is currently around .88 and the long end of the yield curve has rallied significantly - a massive 30 points in the 3 years. The curve has flattened significantly over the last few weeks.
Government Guarantee
At times such as these it's a welcome comfort that up to $1m in deposits with any ADI is guaranteed by a stable AAA rated government until October 2011.
In times such as these there is always a flight to quality. As such the AUD has been sold off and is currently around .88 and the long end of the yield curve has rallied significantly - a massive 30 points in the 3 years. The curve has flattened significantly over the last few weeks.
Government Guarantee
At times such as these it's a welcome comfort that up to $1m in deposits with any ADI is guaranteed by a stable AAA rated government until October 2011.
May 06, 2010
Overseas
Domestic troubles continue in Greece with riots ending in three people dead. Portugal issued bonds at greatly inflated spreads and Spain had to issue a statement saying they were not in financial difficulty.
Govt- Backed mortgage firm Freddie Mac in the USA has asked for a further 10.6Bln bailout due to continued losses.
Building Approvals
Residential building approvals jumped 15.3% in March on the back of a 51% rise in 'other' dwellings. Total detached housing approvals lifted by a more moderate 0.7% in the month. Approvals are up 52% over the year . The overall trend is positive but moderating.
Govt- Backed mortgage firm Freddie Mac in the USA has asked for a further 10.6Bln bailout due to continued losses.
Building Approvals
Residential building approvals jumped 15.3% in March on the back of a 51% rise in 'other' dwellings. Total detached housing approvals lifted by a more moderate 0.7% in the month. Approvals are up 52% over the year . The overall trend is positive but moderating.
May 05, 2010
Pause?
It seems, from the RBA's statement that they are now content with where rates are. Expect a pause in the rate hike process in June.
The concluding paragraphs certainly give me that impression - pasted below.
"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.
The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time."
The concluding paragraphs certainly give me that impression - pasted below.
"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.
The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time."
May 04, 2010
RBA Rate Decision
The odds are certainly stacking up for a tightening today. Sportsbet were offering $2.90 but it's now in to $1.35 for a hike from a $1 bet!
The reason for the big move is that releases yesterday show both commodity and housing prices are booming.
Commodity prices recorded their biggest-ever monthly jump, climbing 17.6 per cent in April. The RBA says the jump only ''partially'' reflects the new higher prices being negotiated for iron ore and coal with the latest deals pushing up the price of iron ore ''around 100 per cent'' and coking coal ''55 to 100 per cent''.
A 20% jump in housing prices is also well reported in the press this morning and given the Governor highlighted his worries about housing in his TV appearance in March one expects this to figure prominently in their discussions this morning. This ABS figure is however not too reliable and is often subject to revisions. John Edwards of Residex also points out that if you drill down into the figures there are some lower socio-economic suburbs where house prices are dropping as people begin to reel from the impact of successive tightenings. For this reason if they do tighten there's a good chance they will pause next month.
The reason for the big move is that releases yesterday show both commodity and housing prices are booming.
Commodity prices recorded their biggest-ever monthly jump, climbing 17.6 per cent in April. The RBA says the jump only ''partially'' reflects the new higher prices being negotiated for iron ore and coal with the latest deals pushing up the price of iron ore ''around 100 per cent'' and coking coal ''55 to 100 per cent''.
A 20% jump in housing prices is also well reported in the press this morning and given the Governor highlighted his worries about housing in his TV appearance in March one expects this to figure prominently in their discussions this morning. This ABS figure is however not too reliable and is often subject to revisions. John Edwards of Residex also points out that if you drill down into the figures there are some lower socio-economic suburbs where house prices are dropping as people begin to reel from the impact of successive tightenings. For this reason if they do tighten there's a good chance they will pause next month.
May 03, 2010
Rate Rise?
The big thing to look out for however is another RBA rate hike tomorrow. With inflation touching the upper boundaries of the RBA target and a 144bln rescue package on the table for Greece there's a good chance they will lift rates in May before pausing in June.
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