RBA on hold while Bernanke buys time

RBA Governor Glenn Stevens noted in his Parliamentary Testimony last Friday that the current economic and global markets forces at work will have a markedly different impact to the Australian financial sector than from those back in late 2008 and early 2009. Specifically outlining the strength in the banking sector, the terms of trade and the improved household credit positions makes for "...a pretty good starting point..." from which the Australian domestic economy may enter a prolonged period of weak global growth. The RBA signalled to the markets Australian domestic interest rates will be on hold for the foreseeable future whilst "...(the) Board will need to make careful judgements over the months ahead…"

The highly anticipated gathering at Jackson Hole, Wyoming provided some reassurance to the markets through Federal Reserve Chairman Ben Bernanke acknowledging that "... growth fundamentals of the US do not appear to have been permanently altered by the shocks of the past four years..." comforting investors somewhat as the S&P 500 rose a moderate 1.5%. Without divulging specifics Bernanke reiterated that the Fed had the power to utilise certain "tools" to stimulate the US economy "as appropriate".

The most significant takeaway from Fridays meeting was the move to allow the FOMC two days instead of one to discuss US Monetary Policy next month. Poignant given the vocal dissent at the last FOMC as 3 of the 10 voting members disagreed with the verbalising of keeping the Fed Fund target cash rate at a record low through to mid 2013. They preferred reference be made to an "extended period". Bernanke now has more time to seek a unanimous mandate for future action.

Markets jittery on eve of Bernanke testimony

Gold rallied from 3 year lows last night and stocks slid as investors eagerly await the Federal Reserve Chairman's speech at the Fed Summit in Jackson Hole, Wyoming in the early hours of Saturday morning AEST (US 10am FrIday). Economic commentators have been see sawing on their positions as to whether Bernanke will provide the much anticipated strategy to assist the ailing US recovery or whether inflationary factors will stay his hand on providing active stimulus to the US economy.

RBA chief Glenn Stevens will present before the Parliament today in an all important review and analysis on the status of the Australian economy. The speech discusses the impact of the current turbulence in offshore markets including the uncertainty surrounding the US and European debt situation and the recent global equity market swings which have impacted local investor confidence. Inflation has been a concern at the start of the year due to local and offshore environmental impacts however the board is confident that they "...can keep it under control..".

Stevens was at pains to distinguish the current economic and global markets from those back in late 2008 and early 2009 outlining the strength in the banking sector, the terms of trade and the household credit positions makes for "...a pretty good starting point..." from which the Australian domestic economy may enter a prolonged period of weak global growth. This allows the RBA to remain vigiliant and prudent and signalling to the markets Australian domestic interest rates will be on hold for the foreseeable future.

Market rally on good news

US Durable Goods Orders last night injected a little optimism into risk markets rising a better than expected 4.0% and sending the S&P 500 and Dow up 1.3% on the close. Gold suffered its biggest fall since 2008 to US$1758.90 an ounce, down 5.5%. US Treasury yields were higher and this morning the Aussie bond market followed suit opening weaker - 3 year futues up 3.840% (96.160) from 3.710% (96.290) yesterday.

Domestic data on Construction Work for the June quarter was released yesterday indicating the intracies of the Australian two-speed economy. Residential construction falling whilst engineering construction was boosted by the mining sector. RBA chief Glenn Stevens will present before the Parliament tomorrow in an all important review and analysis on the status of the Australian economy.

Markets react positively to poor data...? Suncorp profit falls 42%

Despite poor manufacturing and home sales data out of the US last night, markets are expected to open in positive territory following speculation that the Federal Reserve may reveal intentions to put foward a third round f stimulus measures. Fed Chairman Ben Bernanke addresses policy makers on Friday and the market is expecting some form of acknowledgement that active steps need to be taken to assist the economy out of a prolonged growth slump.

Locally yesterday RBA Deputy Governor Ric Battellino suggested that a September interest rate cut was unlikely.
http://www.rba.gov.au/speeches/2011/sp-dg-230811.html

This morning Suncorp Group announced its annual profit at $483 million, a fall of 42% as a result of a string of natural disasters and increased costs by global reinsurers. The financial services divisions continued to lag post the global financial crisis and core profit from the Group's banking division was down from last years $268 million to $259 million.

Data today:-
Aus Q2 construction work (last 0.7%, mkt f/c 1.0%)

Tonight
US Jul durable goods orders (last –1.9%, mkt f/c 2.0%)

Gold hits record high

The price of gold has more than doubled since the global financial crisis unfolded back in 2008. Representing everything from a safe haven asset to an inflation hedge the yellow metal has gone from strength to strength making new highs last night topping US$1900 an ounce. As investors lose confidence in declining share markets and fears of a prelonged period of stunted global growth persists - gold has become a safe port in the storm for many.

Most markets were marginally higher on mixed data. News of Libyan Rebels gaining control over Tripoli and disposing of former leader Moamer Gaddafi was positive news for oil futures, however financial stocks continued to falter as US mortgage delinquencies remained high over Q2.

RBA Deputy Governor Ric Battellino speaks today at AEST1400.

General Malaise

There was no specific news that caused a continues disruption to market stability Friday night. There are continued worries about Sovereign Debt in Europe and a slowdown in growth in the US. Combined with some sectors in the Australian economy suffering severe duress - Bluescope Steel plant closures is one example - the yield curve is likely to remain low and flat for some time.

Mixed signals overnight...a strong posting for AMP this morning

US markets were tethered by poor company results and pessimistic Fed speak as the S&P struggled to close + 0.1% and the Dow + 0.04%. US CPI will be a key indicator overnight 0.2%/3.3% expected. Europe followed suit over quiet holiday trading and very little further information being revealed post the French-German meeting on Tuesday night.

Local data yesterday revealed the Wage Cost Index in line with market expectations rising 0.9% or 3.8% yoy. These figures are within the RBA's parameters and should not have a major impact on underlying inflation as previously feared.

AMP Limited reported a healthy underlying profit of A$455 million for the first half of 2011 up 19% for the same period last year. AMP has remained strongly capitalised as at 30 June 2011 with A$2.2 billion capital above minimum regulatory requirements and up from A$1.4 billion as at 30 June 2010.

Local Data Today:
Average Weekly Wages May Quarter (1.0%/4.0%)

Poor Data and Downward Revisions to Global Growth Forecasts send us into mad Friday...!

After a timid start to the week, a raft of poor US data overnight saw markets react sharply reversing any small gains booked to close down 4.5% (S&P 500). Poor manufacturing data - the worst since the Lehmans collapse - highlighted the slump the US economy is currently in, coupled with further job weakness and above market expectations in core CPI, a slump which may take years to claw out of.

A report by Morgan Stanley economic analysts cited the US and Europe as being "dangerously close to recession" and revising their global growth predictions for 2011 down from 4.2%% to 3.9%. Investor confidence waned and followed suit into European trading. Financial stocks were hit hardest after the Wall Street Journal reported American regulators were investigating the exposure of US banks to any potentional Euro debt crisis via their European units.

ANZ posted a marginal increase in third quarter profit which did not impress, shares falling as much as 5.6%.
With no local data out today our markets will likely follow offshore leads.

RBA requires further signs of growth...France and Germany reject increasing the European Financial Stability Facility

The minutes released by the RBA board yesterday indicated their tightening bias was tempered by international financial market factors and local economic growth concerns. The market has interpreted this caution to remain in place conceivably for the remainder of 2011. Global growth potential will also greatly influence the RBA in the coming meetings.

In the early hours of this morning the Heads of State for France and Germany announced to the markets their intention with "absolute determination" to support the Euro intiative for financial stability stopping short at the possibility however of expandinf the euro bond rescue funds. Markets were less than impressed with the proposed financial transaction tax and poor German GDP figures.

Local Data Today:
Wage cost Index Q2 (mkt +1.0%, 4.0% yoy)

A close call revealed...RBA minutes released 11.30am AEST today

The prudency of the RBA board's decision to leave rates unchanged two weeks ago has certainly been widely acknowledged by market pundits this last week as well timed and thoughtful. With local markets mirroring offshore panic swings, risk assets such as commodities and currencies have been bruised and battered during the onslaught. The possibility of continuing global financial market instability further into 2011 was balanced against the heightened domestic CPI data in the first half of this year resulting in the RBA's stay on rates. The spike in unemployment to 5.1% has also provided subsequent support with 1, 2 and 3 year rates moving sharply down as a result. The interest rate market will be looking to ratify this move through todays RBA rhetoric.

This morning Westpac announced a fall in third quarter profits as compared with the previous two off the back of a slow down in credit appetite amongst business and retail customers.

Yesterdays New Motor Vehicle Sales for July suprised on the upside rising 8.6% recording the strongest growth since December 2000.

Markets pause for a breath

A fairly timid end to a turbulent week as all markets traded in a range rather than swinging wildly as was the case early on. Sentiment seemed to improve in Europe as noted by bank spreads contracting and Italy received a reprieve after a 45 billion euro austerity program was approved. The package includes local government tax cuts and interestingly a "solidarity tax" enforced on high income earners to try and avert an Italian debt crisis. The US received mixed messages as reported retail figures were higher than expected whilst Consumer Sentiment numbers were sharply down.

Locally we await the minutes of the August RBA board meeting due for release tomorrow.

Shock unemployment figures put rate cut back in the picture

The perceived volatility in the global markets had been a major influence in the RBA's decision on August 2, stopping short of raising interest rates amid the spectre of rising inflationary pressures, a very prudent decison 10 days on. The financial markets have faced one of their most turbulent weeks in recent years and the US and European situation seems to have gone from bad to worse in a short space of time. Interest rates have tracked the bearish market sentiment and yesterdays local employment figures have further added cause to their downward spiral. Unemployment rose from 4.9% to 5.1% in July largely effected by the drop in full time employment of 22,000 - a worrying factor which will continue to put on stress on this Nations productivity woes. The market has priced in a rate cut as early as next month and economists predict this may be the start of bearish cycle lasting years.....


Europe plans short-selling ban

The European Securities Market Authority advised that some EU markets have enacted short selling bans on financial stocks to prevent contagion risk spreading across European market indicies stemming from rumour and innuedo currently plaguing bank stocks. France have posed such a ban effective immediately as well as Italy, Spain and Belgium. German officials meet today to discuss their postion whilst the UK Financial Services Authority announced yesterday that it had follow the EU's lead. French Bank Societe Generale was one such bank which exemplified the circulation of "unfounded information" dropping 15% at end of days trading on Wednesday.

No Local Data Today.

The rollercoaster ride continues for stocks....France AAA credit rating in question

The Dow plunged 4.6% to 10,719.94 last night and the S&P 500 tracked downward to a disappointing 4.4% to 1,120.76 the day after posting the largest gains seen since 2008. Poor local news and further rumours of uncertainty out of Europe fueled the risk aversion trades and with financial stocks hit hardest. Societe Generale lost 23% at its worst point in European trading amid negative market rumours and the French Governement also faced scrutiny as it AAA credit rating was put in question. The European Central Bank helped support the Italian and Spanish bond market after a pledge by G7 countries committing deliever financial stability to the region.


Local Data:-
A poor Consumer Sentiment posting (89.6 down 3.5%) conveyed recent fears of falling house prices and economic woes including employment issues. Todays labour force ABS release at 11.30am is broadly expected to see unemployment hold at 4.9% with 10k new jobs being created last month.

FOMC Pledge to Maintain Low Rates through to 2013.

In a 7 to 3 vote in favour of keeping the Fed Funds unchanged at 0-0.25% the US Federal Open Market Committee promised to utilise "...the range of policy tools available to promote a stronger economic recovery..." whilst acknowledging that economic conditions and passive inflationary expectations were likely to warrant such low rates until mid-2013. The Feds previous growth projections were revised as expectations of "...a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting..." was accepted and members discussed ways to actively stimulate a beleaguered US Economy.

Risk markets broadly breathed a sigh of relief and rallied in tandem as stocks soared broadly up 4-5% and currencies including the AUD, NZD and EUR gained over 2c.

Yields on interest rate markets fell echoing the Feds sentiments - the benchmark 10 year note hit a record low of 2.27% the benchmark 10 year Australian equivalent is at 4.55%.

Global Markets on a Slippery Slope...

US and European stock markets had their chance to react to the news America had lost their AAA rating after close last Friday night. Global markets faced one of their blackest days in recent history and well over $100 billion has been wiped off the Australian markets over the last two days of trading. The fear factor remains strong within the region however Treasurer Wayne Swan's comments yesterday reiterated Australia's strong economic position saying we "..are in good shape and could cope with the world the worst could throw at it..."

Interestingly CBA, the nations largestt home lender has cut their fixed mortgage rates by 60 basis points mirroring the downward trend in Australian Money Markets and bond prices. The fear of a global economic recession making its way towards Australian shores is quite real and households may endure tougher times ahead.

Data Today:
NAB Business Survey and Housinf Finance Approvals

USA S&P rating drops to AA+ from AAA

USA S&P rating drops to AA+ from AAA

The impact of the USA losing it's AAA rating, while a bit of a shock to the global system, isn't likely to have too much of a direct impact. In a funny ironic way, if the global contagion intensifies US yields could even drop with a flight to quality!

The more powerful and worrying effect is an indirect one. The lowering in credit rating could impact on global confidence, leading to all sorts of problems - particularly in Europe. If this eventuates the move towards another global recession could have a domino effect that will certainly arrive on our shores. It's a pretty safe bet that the RBA will continue it's holding pattern at the moment and if global markets don't settle down a drop in the cash rate becomes a real possibility.

US Non-farm Payrolls

Some respite in the US was a lift in the non-farm payrolls for July where they rose a little higher than expected at 117,000 (forecast 85k).

RBA Statement on Monetary Policy

Friday's statement had their GPD forecast dropping to 3.25% from their previous forecast of 4.25%. Quite a significant drop. Growth for the year to June 2012 was lifted to 4.5%. They have underlying CPI rising rising to 3.25% in 2011 but then dropping 3.00% and then lifting to 3.25%. As the max in their band is 3% a rate hike at the time of writing would have still been in their thinking. This is likely to have changed now of course.

Inverse Yield Curve

Turmoil has gripped global markets overnight. You may have heard about the moves overnight - briefly:

S&P - 4.8%
Dow - 4.3%
US 10 yr Bonds rallied 22 points to 2.40%
US 2 yr Bonds rallied 8 points to 0.83%
Commodities down across the board
AUD around 1.04

The worry is that the world is moving towards another global recession. Poor figures out of the States and worries now about Italy have given some cause for thinking that China may be effected and we all know what a slow down there means for Australia.

The RBA is no doubt releived that they didn't tighten and the market is now pricing the new market dynamic into the shape of the curve. An inverse yield curve (short rates higher than long rates) generally means we are moving towards a recession. Whether that's the case is anyone's guess but it's clear that yields will remain subdued while this uncertaintly swirls around global markets.

If you've locked in some longer deposits at decent rates you'll be no doubt quite content but if you haven't there are still some good opportunities around. For instance have a look at the AAA RaboDirect rates in the rate sheet.

Global realignment of risk expectations

Markets around the globe are trying to come to terms with a great many elements at the moment and this is causing a reappraisal of risk and prices.

Italy: European worries are now moving to Italy causing their stock market to sell off aggressively and their bond market to price in significantly more risk. Bond yields have moved to record highs.

US: Service Industry and consumer indicators recently released in the US are showing that their economy is still in a very precarious state. The fiscal tightening required to get their debt under control could exacerbate this weakness and talk is now circulating about the Fed having to weigh in with Q3

Australia: Retail sales figures released yesterday were below expectations and headlines in NSW newspapers are highlighting the atrocious state of the NSW retail sector by proclaiming the figures to be the worst for 50 years. This, on top of moribund Building Approval figures released earlier in the week and overseas developments have caused the Australian stock-markets to fall to levels 13% lower than April levels and for interest rate markets to more firmly price in a rate cut before year end. BBSW has bounced back from yesterday's huge rally / overshoot.

Rates unchanged but the uncertainty persists

Touted as the closest call the RBA Board has had to make in recent months, the decision to leave interest rates on hold yesterday was largely swayed by international financial market uncertainty. The Board noted that "...Downside risks have increased..." in Europe but also in recent times in the United States. Supply chain disruptions caused by the Japanese earthquake have persisted and the pace of growth in China remains a concern. Overall global expansion is slowing but nonetheless continuing. Domestically it seems the Board has accepted that "...the medium term outlook for inflation..." is a concern however is likely to abate in the latter half of 2011. For this reason the RBA left the cash rate at 4.75.

We look ahead to Friday's (11.30am AEST) Statement on Monetary for a greater insight into the Reserve Bank's view on growth and inflation in the coming months.

Bears trawl through overnight markets

Risk aversion trades affected equity, currency and commodity markets last night as global growth fears took centre stage. With weaker than expected data hitting the US and renewed concerns over Italian and Spanish sovereign debt, investors sought the safety net of US Treasuries, gold and Swisse. In fact the entire hard fought gain in the S&P 500 and DJIA was wiped out closing 2.6% and 2.2% down respectively.

Split Decision....RBA interest rate announcement 2.30pm AEST

Economic guru's are divided in their predictions on the RBA's decision on interest rates expected to be announced at 2.30pm AEST today. At one end of town a major is looking towards an imminent rate rise of 25bps and at the other of end of town rates are predicted to be on hold and then set for a drop before year end. Whatever the announcement today you can be sure that the pace of discussion behind closed doors at 65 Martin Place will have been fast and furious. Business leaders on the Board will surely be stating a case of lagging consumer spending and increased production costs due to the floods - a potential rate rise further hampering their plight. On the other hand a booming mining sector and a rapid rise in inflation continues to niggle at the RBA making this one of the closest calls the Board has had to make in well over a year.

US enjoys a reprieve as debt ceiling is raised

Markets reacted positively to the initial announcement that a compromise had been reached allowing the US Treasury to borrow money and fulfil its debt obligations today. The deal calls for US$2.4 trillion in spending cuts over the next 10 years, US$900bn in immediate relief providing certainty of funding until February next year.

Crunch time... US President Obama address today 11am AEST

Nothing short of global economic upheaval will be the result if the US President does not broker a deal before August 2 to lift the US borrowing debt ceiling and break the deadlock between Congressional Party leaders. Global economies including Australia are holding vasts amounts of US Treasury stock which potentially may face the wrath of ratings agencies if the US is perceived not to be unable to meet its debt obligations going forward. It was noted in May that Australia is the 34th largest creditor, the largest being China with $US1.159 trillion, then Japan $US912.4 billion followed by Britain $US346.5 billion.