The RBA Assistant Governor Guy Debelle spoke yesterday, stating that bank asset quality is the primary determinate of financial strength. This view is in contrast to that of ratings agencies, who have noted that the banks major concern is the reliance on wholesale funding.
The Greek parliament will vote tonight on their latest austerity package. The last couple of days have seen confidence in the notion that the package will be passed, and the market has this priced in. If the vote does fail, risk weighted assets, such as the AUD, will see significant declines.
Today in Australia will see Skilled Vacancies released for June.
June 30, 2011
June 29, 2011
Greek Bond Agreement
A key development in Europe overnight saw reports that Greek sovereign debt bond holders considered a plan to roll 50% of debt that is maturing in 2014. According to the plan, the debt would be rolled to a 30 year Greek bond, which would be priced at around 3%. The plan is being compared to the ‘Brady bonds’ issue of 1989, which was used to restructure the Latin American sovereign debt crisis.
Yield Curve
There have been a number of interesting movements in interest rates and the yield curve over the last couple of months so it’s worth reviewing where we are at the moment and where the market is telling us that we’re headed. This is also in light of the strong rally in interest rate futures yesterday where bills moved 15 points lower, 3 years a little over 10 points and 10 years a little under 10 points ( the market has re-traced half of those moves this morning).
As recently as one month ago the market was enthused enough by the RBA Statement on Monetary Policy and the May Board minutes to start factoring in a couple of rate hikes in 2011. The major banks had been predicting the rate hike process to resume as early as this month. The spread between cash to 180-day bills was 45 points, to 3 year swap (qtly) was about the same and to 10 year sway was 100 points.
The yield curve at that point was particularly flat. However the June minutes indicated the RBA was a little less enthusiastic about an imminent rate hike due to a number of factors including domestic lacklustre indicators and offshore uncertainties. The market started rallying, especially yesterday, moving the curve flatter on its march towards tipping the curve over to inverse. This will only happen if the RBA tightens a couple more times and the market takes the view they have moved too far. An inverse curve is the market’s way of saying ‘we’re headed for a recession’.
In comparing the curve to a month ago the spread now from cash to 180-day bills is 30, to 3 year swap (qtly) is 20, to 10 year swap is 90 (to 10 yr govt bond is only 25 points).
We have been recommending to our clients for some time to take advantage of specials in the longer end of the yield curve ie from 1 year and out. The reasons for this are two-fold. One reason is to lock in, for a reasonable period of time, the historically high spread that deposits are trading over wholesale rates. The other is that the world still has some way to go to extricate itself from the troubles of 2008 and as such interest rates have limited upward trajectory. This is reflected in the flat yield curve with the market expecting the interest rate status quo to remain for some time. Specials that put a bit of artificial steepness in the curve should therefore be taken advantage of.
The Reserve Bank Assistant Governor Guy Debelle will speak in Sydney today on the topic of ‘Collateral, Funding and liquidity’.
Yield Curve
There have been a number of interesting movements in interest rates and the yield curve over the last couple of months so it’s worth reviewing where we are at the moment and where the market is telling us that we’re headed. This is also in light of the strong rally in interest rate futures yesterday where bills moved 15 points lower, 3 years a little over 10 points and 10 years a little under 10 points ( the market has re-traced half of those moves this morning).
As recently as one month ago the market was enthused enough by the RBA Statement on Monetary Policy and the May Board minutes to start factoring in a couple of rate hikes in 2011. The major banks had been predicting the rate hike process to resume as early as this month. The spread between cash to 180-day bills was 45 points, to 3 year swap (qtly) was about the same and to 10 year sway was 100 points.
The yield curve at that point was particularly flat. However the June minutes indicated the RBA was a little less enthusiastic about an imminent rate hike due to a number of factors including domestic lacklustre indicators and offshore uncertainties. The market started rallying, especially yesterday, moving the curve flatter on its march towards tipping the curve over to inverse. This will only happen if the RBA tightens a couple more times and the market takes the view they have moved too far. An inverse curve is the market’s way of saying ‘we’re headed for a recession’.
In comparing the curve to a month ago the spread now from cash to 180-day bills is 30, to 3 year swap (qtly) is 20, to 10 year swap is 90 (to 10 yr govt bond is only 25 points).
We have been recommending to our clients for some time to take advantage of specials in the longer end of the yield curve ie from 1 year and out. The reasons for this are two-fold. One reason is to lock in, for a reasonable period of time, the historically high spread that deposits are trading over wholesale rates. The other is that the world still has some way to go to extricate itself from the troubles of 2008 and as such interest rates have limited upward trajectory. This is reflected in the flat yield curve with the market expecting the interest rate status quo to remain for some time. Specials that put a bit of artificial steepness in the curve should therefore be taken advantage of.
The Reserve Bank Assistant Governor Guy Debelle will speak in Sydney today on the topic of ‘Collateral, Funding and liquidity’.
June 28, 2011
RBA Assistant Governor
Dr Phil Lowe spoke on Friday and confirmed the impression that the next rate hike is still some time away. They are keeping a close eye on labor cost pressures leading to widespread inflation that may come from capacity constraints.
In Europe the contagion continues. Italian banks came under significant pressure after rumours went around saying some may not pass stress tests in July. Shares in several were temporarily suspended after sudden drops in their share values.
In Europe the contagion continues. Italian banks came under significant pressure after rumours went around saying some may not pass stress tests in July. Shares in several were temporarily suspended after sudden drops in their share values.
June 24, 2011
Greek Update
In Europe last night, head of the ECB Jean Claude Trichet stated that sovereign debt issues were ‘flashing red’ for the Euro bloc. He described the problem as ‘the most serious threat to stability in the European Union’.
It appears that the ‘big four’ banks would have to pay higher spreads for debt in comparison to international banking rivals of similar credit ratings. Australian Banks will be expected to pay a premium to their Asian and US counterparts if they were to tap the wholesale markets for long dated issuance even though outright exposure to Greek investments are expected to be minimal. The credit risk is being priced higher because of
the dependence on wholesale funding, severe disruptions to which had been felt in previous episodes of instability.
Today in Australia, RBA Assistant Governor Phillip Lowe will be giving a speech in Adelaide on the topic of inflation.
It appears that the ‘big four’ banks would have to pay higher spreads for debt in comparison to international banking rivals of similar credit ratings. Australian Banks will be expected to pay a premium to their Asian and US counterparts if they were to tap the wholesale markets for long dated issuance even though outright exposure to Greek investments are expected to be minimal. The credit risk is being priced higher because of
the dependence on wholesale funding, severe disruptions to which had been felt in previous episodes of instability.
Today in Australia, RBA Assistant Governor Phillip Lowe will be giving a speech in Adelaide on the topic of inflation.
Greek Confidence Vote
The Greek Prime Minister survived a confidence vote yesterday, which essentially would allow him to push forward with the austerity package. This has confirmed that Greece will get the next installment of funds from the EU/IMF before July 15, ensuring they won’t default on their sovereign debt (at least in the short term). If this occurred, we would potentially see widespread turmoil throughout Europe.
The Federal Markets Open Committee left US rates unchanged overnight, and mentioned that rates would be low for ‘an extended period’, as widely expected. Futures traders in Australia are currently pricing a 33% chance that the next RBA move will be a drop in the
cash rate. It is our view that the probability of a cut is minimal, as the RBA has consistently stated that inflationary pressures in the medium term will start to materialize.
Second tier data to be released in Australia today.
The Federal Markets Open Committee left US rates unchanged overnight, and mentioned that rates would be low for ‘an extended period’, as widely expected. Futures traders in Australia are currently pricing a 33% chance that the next RBA move will be a drop in the
cash rate. It is our view that the probability of a cut is minimal, as the RBA has consistently stated that inflationary pressures in the medium term will start to materialize.
Second tier data to be released in Australia today.
June 23, 2011
RBA Minutes
The RBA minutes from the June Board meeting has pushed out expectations of when the next hike will be. The Board noted many concerns that it had regarding the Australian and world economy, despite the fact that the mining sector remains robust. On the local front, the Minutes cited moderate credit growth, slow retail growth, a soft housing market and the slowing momentum of employment as reasons to suggest that
no urgency was needed. Sovereign debt issues in Greece also gained the attention of the Board, as longterm rates in stable European countries were beginning to rise. Despite the negativity, the RBA still expect to tighten rates ahead, mentioning that the gradual pick-up in inflation would mean that ‘further tightening in monetary policy would be necessary at some point’. In order to see a hike in August we would need a higher than expected CPI figure, such as 0.9%, otherwise look for a move later in the year.
Australian ABARES Quarterly Commodities report increased it forecast for exports in the coming financial year by 2%. This would see an overall increase in exports of 18% next year, as both volumes and prices are expected to rise.
Today in Australia, the Westpac Leading Index is due for April. The focus however will remain on Greece, as the problems are starting to see issues materialise throughout the whole region.
no urgency was needed. Sovereign debt issues in Greece also gained the attention of the Board, as longterm rates in stable European countries were beginning to rise. Despite the negativity, the RBA still expect to tighten rates ahead, mentioning that the gradual pick-up in inflation would mean that ‘further tightening in monetary policy would be necessary at some point’. In order to see a hike in August we would need a higher than expected CPI figure, such as 0.9%, otherwise look for a move later in the year.
Australian ABARES Quarterly Commodities report increased it forecast for exports in the coming financial year by 2%. This would see an overall increase in exports of 18% next year, as both volumes and prices are expected to rise.
Today in Australia, the Westpac Leading Index is due for April. The focus however will remain on Greece, as the problems are starting to see issues materialise throughout the whole region.
June 21, 2011
Attempts to Stabilise Greece
The Greek PM Papendreou has been forced to re-shuffle his Cabinet, as the Finance minister Papaconstantinou is being replaced by Venizelos, the ex-defence head. The move has been initiated to try and stabilise the government, which has been torn internally regarding the austerity measures placed by the EU and the IMF. Euro Finance Ministers are currently meeting regarding the necessity of another bailout package, given that Greece is now effectively locked out of tapping into global capital markets. Moody’s has
also placed Italy’s credit rating on review for a possible downgrade.
Australia will see two RBA events this week, with the release of this months Board meeting minutes tomorrow, while the Assistant Governor (Phillip Lowe) speaks in Adelaide on Friday.
also placed Italy’s credit rating on review for a possible downgrade.
Australia will see two RBA events this week, with the release of this months Board meeting minutes tomorrow, while the Assistant Governor (Phillip Lowe) speaks in Adelaide on Friday.
June 17, 2011
RBA Governor Brings Back Rate Hike Expectations
Governor Stevens spoke yesterday and re-iterated his desire to raise rates at some point. They are waiting for further data to be released in July, which brings an August rate hike into focus. “As far as prices are concerned, we will get another comprehensive round of data in late July” (PPI, CPI)
Consumer Confidence
The Westpac-Melbourne Institute consumer sentiment index edged lower in June, in the wake of the softer than-expected labour market report for May and the RBA keeping rates on hold, but still “assessing carefully”, that is still with a tightening bias. Overall, while confidence is far from collapsing, it still has that cautious element to it.
Dwelling
Dwelling commencements rose 3.1% in Q1, offsetting a 4.0% fall in Q4, better than the consensus (market - 0.8%; NAB -2%) owing to medium density starts this quarter up 14.7% after a 6.1% rise in the December quarter to be up 36% y/y, private detached house starts fell 1.9% in Q1 after a 6.7% fall in Q4 &P and signals the possibility of the first sovereign default in the euro regions history.
Consumer Confidence
The Westpac-Melbourne Institute consumer sentiment index edged lower in June, in the wake of the softer than-expected labour market report for May and the RBA keeping rates on hold, but still “assessing carefully”, that is still with a tightening bias. Overall, while confidence is far from collapsing, it still has that cautious element to it.
Dwelling
Dwelling commencements rose 3.1% in Q1, offsetting a 4.0% fall in Q4, better than the consensus (market - 0.8%; NAB -2%) owing to medium density starts this quarter up 14.7% after a 6.1% rise in the December quarter to be up 36% y/y, private detached house starts fell 1.9% in Q1 after a 6.7% fall in Q4 &P and signals the possibility of the first sovereign default in the euro regions history.
Further Concerns in Greece
In an astonishing reversal yesterday, Australian interest rate markets moved to price in a 6% chance of a rate cut at the next meeting (July). The catalyst has been the growing concerns in Greece in relation to the failed attempts to reconstruct their debt positions. If this were to materialize, it would have severe implications on world growth.
Consumer inflation expectations, released yesterday, remained unchanged at 3.3%yoy for the month of June.
New Motor Vehicle Sales (May) fell by 7.6% after a 3.5% decline in May.
No Scheduled events in Australia today.
Consumer inflation expectations, released yesterday, remained unchanged at 3.3%yoy for the month of June.
New Motor Vehicle Sales (May) fell by 7.6% after a 3.5% decline in May.
No Scheduled events in Australia today.
June 15, 2011
After shocks rock Christchurch
The City of Christchurch was hit at 1pm yesterday by a magnitude 5.5 quake closely followed by a more powerful magnitude 6.0 quake at 2.20pm. Whilst there were no reports of any deaths, the damage bill to buildings and infrastructure continues to mount. Last years magnitude 7.0 quake in September and the devastating February quake has left New Zealand with a NZ$15 billion damage bill. RBNZ Governor Bollard is unlikely to raise interest rates from a record low of 2.5 percent.
Fitch Downgrades Suncorp-Metway Ltd (SML)
On completion of its review late Friday Fitch lowered the Long-Term Issuer Default Rating to A from A+ outlook stable as a result of “continued weakness in asset quality” following the 1H11 company results.
S&P lowers Greece ratings - again
Standard & Poors has cited a “significantly higher likelihood of one or more defaults” further pressuring Greece’s financing needs. The move from CCC to single B affords Greece the worlds lowest credit rating rating by S&P and signals the possibility of the first sovereign default in the euro regions history.
Fitch Downgrades Suncorp-Metway Ltd (SML)
On completion of its review late Friday Fitch lowered the Long-Term Issuer Default Rating to A from A+ outlook stable as a result of “continued weakness in asset quality” following the 1H11 company results.
S&P lowers Greece ratings - again
Standard & Poors has cited a “significantly higher likelihood of one or more defaults” further pressuring Greece’s financing needs. The move from CCC to single B affords Greece the worlds lowest credit rating rating by S&P and signals the possibility of the first sovereign default in the euro regions history.
June 10, 2011
Employment Report
7,800 new jobs were created in May, leaving the unemployment rate steady at 4.9%. The outcome was well below the consensus of +25,000, and may be signaling a ‘bottoming out’ in the employment market. This was re-instated by the fact that 22,000 full-time jobs were lost, as part time employment rose by 29,800. Markets reacted quickly to the news, and slashed expectations of a rate rise this year to just 50%, down from around 75%, and the likelihood a July hike to almost non-existent. Rates across the board will be
around 5bp lower today.
ECB President Trichet signaled that a rate rise in Europe was imminent.
The BoE left rates unchanged, however also signaled that a rate rise was coming.
No local data today.
around 5bp lower today.
ECB President Trichet signaled that a rate rise in Europe was imminent.
The BoE left rates unchanged, however also signaled that a rate rise was coming.
No local data today.
June 09, 2011
RBA Remains on Hold
The RBA decided to leave the cash rate unchanged at 4.75% yesterday, where it has been now for 7 months. The reasons cited in the accompanying statement were that commodity prices had softened of late and the uncertainty surrounding sovereign debt issues in Europe. The RBA also acknowledged that we have a multi speed economy, and that outside the resource sector investment intentions had been revised lower. It was interesting to note that the RBA’s assessment of the medium term outlook was the same, as for May, ie
that overall growth is likely to trend higher in the medium term. Given this, the RBA will need to tighten in the not to distant future, most likely in July or August.
Housing Finance for April will be released today, with the market expecting a 2.3% jump in the headline number.
that overall growth is likely to trend higher in the medium term. Given this, the RBA will need to tighten in the not to distant future, most likely in July or August.
Housing Finance for April will be released today, with the market expecting a 2.3% jump in the headline number.
June 08, 2011
ANZ Job Ads
ANZ Job Ads for the month of May fell by 6.5%, in a result that was well below the market forecast. ANZ suggested that the Easter/ANZAC long weekend might have caused seasonal adjustment issues, meaning that the fall may be overstated. Job Ads are still 8.5% higher than this time last year.
The Reserve Bank will meet today, and will sit the first live meeting that we have seen in several months. Given the recent bout of negative data and the continuing uncertainty in Europe, we believe that the RBA don’t need to rush into a decision. Nevertheless, Glenn Stevens has shown that he is not afraid to make tough decisions, so a lift in the cash rate will come at no surprise. As mentioned yesterday, 4 out of 28 economists in the Bloomberg Survey have tipped a rate rise, with the futures market pricing in a 16% chance of a hike.
The Reserve Bank will meet today, and will sit the first live meeting that we have seen in several months. Given the recent bout of negative data and the continuing uncertainty in Europe, we believe that the RBA don’t need to rush into a decision. Nevertheless, Glenn Stevens has shown that he is not afraid to make tough decisions, so a lift in the cash rate will come at no surprise. As mentioned yesterday, 4 out of 28 economists in the Bloomberg Survey have tipped a rate rise, with the futures market pricing in a 16% chance of a hike.
June 07, 2011
US NON FARM PAYROLLS & RBA
A disappointing result in Non-Farm Payrolls on Friday with an increase of only 54k against expectations of +165k. This is a big slowing after an average 220k per month for the previous three months. The unemployment rate lifted to 9.1% from 9%.
The RBA Board meeting is tomorrow and even though I’m sure they want to act preemptively against inflation recent weak data will give them cause to hold for the moment. Only 4 out of 28 economists are tipping a rise tomorrow. The market has priced in a 12% chance.
The RBA Board meeting is tomorrow and even though I’m sure they want to act preemptively against inflation recent weak data will give them cause to hold for the moment. Only 4 out of 28 economists are tipping a rise tomorrow. The market has priced in a 12% chance.
June 02, 2011
National Accounts
The impact of the QLD floods, particularly on coal exports, became evident in the GDP figures yesterday. The -1.2% for the Qtr is the largest negative since our last recession in the early 90s. On a year on year basis it’s 1.0%. Despite the drop there is still evidence of strength on the underlying economy so it certainly doesn’t end RBA rate hike expectations. There is still a good chance they will move in July or August.
The post flood growth outlook depends on how quickly coal exports rebound but NAB forecasts have +1.5 in the June qtr and +1.8% in Sept qtr before dropping back to trend at 1.1%. This would provide a year of 3.2%, which is still reasonable.
In Australia today retail sales are due and anecdotal evidence and the very strong savings ratio households currently have suggest it won’t be impressive.
The post flood growth outlook depends on how quickly coal exports rebound but NAB forecasts have +1.5 in the June qtr and +1.8% in Sept qtr before dropping back to trend at 1.1%. This would provide a year of 3.2%, which is still reasonable.
In Australia today retail sales are due and anecdotal evidence and the very strong savings ratio households currently have suggest it won’t be impressive.
June 01, 2011
Net Exports
Net exports came in much lower than expected yesterday, as an 8.7% plunge in the total volume of exports will account for -2.4% contraction in Q1 growth, well below the -1.1% forecast. The floods/cyclone disaster has obviously been at the forefront of the problem, as Coal exports were down a whopping 26.8% for the quarter. This data will most likely see today’s GDP figure lower than what the market had originally thought,
as the consensus has dropped to -1.1% to -1.4%.
RBA Credit for April was flat, below the market forecast of 0.5%.
RP Data-Rismark data for April saw city dwelling prices fall by 0.3%, seasonally adjusted.
Today will see GDP for Q1 released, where we are expecting a considerable drop in output. Also today, we will see RBA Commodity Prices (May), Trade balance (Apr) and Retail Sales (Apr).
as the consensus has dropped to -1.1% to -1.4%.
RBA Credit for April was flat, below the market forecast of 0.5%.
RP Data-Rismark data for April saw city dwelling prices fall by 0.3%, seasonally adjusted.
Today will see GDP for Q1 released, where we are expecting a considerable drop in output. Also today, we will see RBA Commodity Prices (May), Trade balance (Apr) and Retail Sales (Apr).
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