October disaster averted - markets rejoice in European resolution!

As further details emerged on the three-step plan negotiated at the EU Summit this week the European Markets reacted strongly and gathered momentum. Stocks were up 2.9% in London and 6.3% in Paris. As risk sentiment returned so to did the Aussie dollar up 3 per cent to $US1.07.

With a path now in place for Europe to begin the rebuilding phase of a shaken financial system global market tensions have eased and likely to put less strain on the local domestic economy. Thus the RBA may return its cautious approach going into the second last meeting of 2011.

Two out of three ain’t bad! European Union Summit makes progress... Aussie underlying CPI opens the door for the RBA

Global markets breathed a sigh of relief as the EU Leaders 14th Summit in 21months produced some strong initiatives. The 27 participants agreed to an increase of 1 Trillion Euros to the Economic Financial Stability Facility that aims to support countries in the region in satisfying their sovereign debt commitments. This seems to have satisfied investors that in the event of ongoing support to embattled nations such as Greece, Portugal and Ireland there is still room to provide support to others such as Italy who may be in need.

A European bank recapitalisation plan was also tabled and agreed. Reuters reporting that the core capital ratios of banks were to be raised to 9 per cent by June 2012. Banks however have not agreed on what the eventual write-downs will be on their holding of Greek sovereign debt.

Australian Q3 headline CPI released yesterday came in right on consensus at +0.6 QoQ and +3.5 YoY however the underlying or trimmed mean figure was below expectations. This potentially opens the door for the RBA to ease rates.

Finance Ministers meeting in Europe cancelled…Australian Q3 CPI data released today 11.30 AEDT

Global markets were cautious overnight awaiting the outcomes of the EU Leaders Summit scheduled this evening. The precursor to this meeting was to be a gathering of the regions Finance Ministers which was apparently cancelled and deemed unnecessary ahead of this evenings proposed agenda. Strong action is required to prevent the market from showing severe disdain.

Australian Q3 CPI is scheduled for release this morning. Market concensus is +0.6 QoQ and +3.5 YoY. Annual inflation is predicted at 2.75% which is within the RBA’s implied target. Any deviation to the downside presents an opportunity to ease however we see the likely outcome next Tuesday is rates on hold.

CPI expected to be in RBA's target range - rates on hold?

A strong signal has been delivered this morning from the RBA via Deputy Governor Ric Battellino’s speech on Economic and Financial Developments. He acknowledged that while the global markets remain reasonably fluid key indicators such as global GDP growth remain in line with their expectations hence predicting a “…a reasonably benign environment for the Australian economy…”

The Deputy Governor also acknowledged the strong emerging markets influence on growth has potential to wane however language such as “…this will flow through in due course…” grants the RBA the leverage to use monetary policy sparingly in the coming months.

Although the RBA made mention that an improved inflation projection “…would increase the scope for monetary policy to provide some support to demand, should that prove necessary…” we believe that the underlying rate of inflation released tomorrow will be within the RBA’s expectation and stay their hand on any cash rate adjustment.

EU Summit part 2 required to finalise bank recapitalisation plans...A week ahead of key data

Last Sunday’s meeting of all 27 European Union member representatives failed to finalise a solution to the regions mounting debt crisis. Although a broad plan was outlined important resolutions such as European bank recapitalisation, rumoured to be just over Euro $100 billion, are still pending. Policies to ensure embattled countries such as Italy, Spain and Greece embark on debt and deficit restructuring measures are also yet to be outlined. The second part of the EU Leaders Summit will take place this Wednesday.

This week key data in the US and in Australia will provide momentum across markets with ammunition to react ahead of both countries monetary policy meetings next week. In Australia today we have PPI mkt +0.8%for the month and +2.9%yoy. PMI’s are also released in Europe tonight but GDP on Thursday will be a key determinate to assess the nations growth over Q3. Australia can also look toward a CPI release this Wednesday a vital component of the RBA’s interest rate intentions going forward.

Figures out of the US overnight were slightly positive overall but were overshadowed by ongoing concerns from Europe

The fall in US Jobless figures (403k from 409k) continued their downward trend which began in April and the Philly Fed manufacturing Index showed an unexpectedly promising result (+8.7) which outweighed a fall in existing house sales and contributed to a slight rise in US treasuries. 10yr yields were up 0.02% to 2.18% and 30yrs up 0.03% to 3.17%

However divisions remain in Europe and despite assurances from Germany and France there are still doubts over the ability of the Union to reach agreement at either of the Sunday or Wednesday summit meetings.

Locally the release of the CPI figures on Wednesday 26th October will be a focus.

Public Demonstrations in Greece amid Parliamentary Vote on Reforms...RBA examines Bank Funding

As protestors rallied through Athens yesterday the Greek Parliament pushed through the first stage of their austerity measures ensuring global markets remained subdued. A final vote is due this evening and is likely to be passed despite local uprisings. European markets closed in positive territory.

Assistant Governor Guy Debelle addressed the annual FTA congress yesterday and discussed the issue of bank funding amid the current volatile financial markets. Asserting that “…Australian banks' deposits with the RBA (ES balances) have remained around $1¼ billion for over 18 months now….” Indicates little counterparty pressure in the interbank market. “…deposit growth has outstripped credit growth..” and provided an alternate source of bank funds as opposed to tapping wholesale debt markets.

RBA minutes reveal "a very complicated task"

The Reserve Bank of Australia's monetary policy meeting minutes released yesterday indicate the fluidity by which future decisions on interest rates will be required to be made. Developing global market uncertainty and financial market instability has put pressure on Australian domestic economic conditions “…which was complicating the task of assessing the strength of the overall economy…”

Mixed key indicators have confirmed an improvement in inflationary expectations early into the new year however the cautious household sector and poor consumer wealth sentiment may continue to dampen productivity for the economy as a whole.

The RBA has provided for any potential adjustment in terms of monetary policy assisting demand to remain a key part of their statement last month however the balance of expectations now sees any use of such a tool on standby.

European deadline looms however more time maybe needed…RBA minutes released at 11.30am

The October 23 G-20 summit was supposed to reveal the Euro zones plan to stabilise the region and put forward cohesive measures to prevent any on going sovereign debt crisis however a speech last night by the German Finance Minister indicated there will be no “quick fix”. Unfortunately the rally of optimism in the financial markets was thwarted by Schaubles’ comments as realisation any solution may take some time.

This morning the RBA minutes of this months board meeting will be released at 11.30am. Although the board acknowledged that inflationary expectations have eased the change in rhetoric over the past 3 months will make for interesting reading and provide clues toward their bias for the remaining two meetings for 2011.

US Retail Sales higher

A boost to the embattled US economy through retail sales on Friday night will keep investor confidence high through markets this Monday morning. A stronger than expected 1.1% means US retail sales are now running +7.5% yoy which is promising in terms of consumer sentiment.

In European news S&P downgraded Spain’s long term debt to AA from AA- as economic growth and systemic banking issues continue to hamper the nation.

Domestically the RBA board minutes are released tomorrow providing some insight towards the two remaining meetings for this year.

Shock Australian Employment data send rates higher!

Employment data released yesterday surprised sharply on the upside as a result of an unexpected increase in jobs gained. Australia's unemployment rate moved down to 5.2% as 20,400 jobs were added. Interest rate markets sold off boosted by the positive data, the first increase since in over three months.

Europe buoyed by EU Commissioners comments...US FOMC minutes released

A “united effort” was the message from the European Union Commission President Jose Barroso last night as he promised to deliver funds to Greece and employ a permanent strategy to support the region in the future. European markets took heed and ended in positive territory.

In the US FOMC minutes showed the divergence between economic indicators and pessimist investor confidence at all time wide levels. The “considerable uncertainty” being faced by the embattled nation and indeed the world has forced the board to keep a third round of Quantitative Easing in reserve to be called on if required.

Labour force data released today is expected to see the unemployment rate hold steady at 5.3%.

Slovakia slows down the ratification of the expansion of the EFSF

16 out of the 17nation Euro zone participating countries have agreed on policy measures to expand the European Financial Stability Facility (EFSF) designed to prevent the spread of a sovereign debt crisis among its members. Slovakia held up the process of ratification last night as the countries main opposition party staged political warfare designed to deleverage the government in power. The vote is expected to go through today after the current standing government meets particular provisos imposed.

Yesterdays NAB monthly Business Confidence Survey rose as expectations of easing interest rates and depreciation of the Australian dollar would assist companies struggling with productivity pressures. Consumer Confidence is released later today as well as Housing Finance Data.

European bank recapitalisation a reality as first European sovereign intervention required

Amid the backdrop of a French and German alliance to propose a plan to bolster the capital structure of European banks, the Franco-Belgium-Luxemberg banking configuration of Dexia is set for dismantling. The Belgium government is buying the Belgium banking arm for $4bn Euro as plans to provide a further $90bn Euro in funding over the next 10 years were announced.

Risk assets benefited from the Euro optimism as the Australian Dollar rallied back to parity this morning and commodities performed strongly.

This morning the NAB business confidence Survey for September is released while ANZ job ads fell 2.1% as expected.

A positive start to the week

The US added 103,000 jobs in September and revised upwards the dismal previous months forecast to provide a boost to risk sentiment and investor confidence this morning. Although Europe faced some negative ratings agency action from Fitch (Spain and Italy sovereign debt ratings were downgraded) the market once again took heart from the German and French resolve to announce a plan in the coming weeks.

In local news Consumer sentiment is released on Wednesday and will provide a market barometer as to the recent impact of the global financial turmoil over the past few months. Key data on Thursday is the ABS release of labour market figures - forecasts indicate a small rise of 10k.

Talk turns to action as the ECB and BoE do their bit

Voicing concerns about growth and amid a sense of foreboding that Europe’s debt crisis may deepen before it gets better the Bank of England Governor and the European Central Bank President announced plans to help stabilise the region.

The BoE announced plans to increase its bond purchase program by $75bn pounds to $275bn pounds the largest increase to its quantitative easing program since March 2009. Similarly the ECB pledged support to the financial sector by extending its long term funding operations with European Banks and encouraged them to participate in the $40bn Euro covered bond purchase program. Neither Central Bank moved on their respective cash rates.

In local data construction activity reported this morning indicated further cause for concern as the index fell for the16th consecutive time. Slipping 2.1 points to 30 points in September the worst performance since February 2009.

Equities higher on suggestions of European bank recapitalisation

Global stock markets rallied around speculation that European officials were meting out a proposal to support the regions troubled financial sector and bolster bank capital. As France and Belgium work to contain Dexia SA’s declining trading book via a “special purpose vehicle” rumours circled posing a similar possible solution for poor performing Spanish and Italian bonds. The market once again took exaggerated heart out the Eurozones determination to work towards a solution with out any concrete resolution.

US private employment data reported overnight was better than expected (+91K) while manufacturing data fell slightly in August to 53.0 from 53.3 (mkt 52.8).

No local data today. BOE and ECB hold their monetary policy meetings tonight.

RBA's inflation concerns abate and preparations are being made to act...if required

The careful and precise tones of the Reserve Bank of Australia's monthly overtures has been been replaced with backflips and cartwheels over the last three months as the Board struggles to keep up with the velocity of global markets. To recount;

Back in August the Board had remained “…concerned about the medium-term outlook for inflation…” as a consequence of severe weather and natural disasters having supply side effects. Global growth forecasts were optimistic despite the first mention of growing concerns “…for the public finances of both Europe and the United States.” The decision to keep the cash rate on hold was openly acknowledged as one of the closest calls the RBA had to make.

Prudency was rewarded as September’s Monetary Policy decision highlighted the “…uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States…” The RBA’s inflation concerns were mitigated to a degree by “…continued cautious behaviour by households…”


The October statement by Glenn Stevens importantly acknowledged the RBA is poised to act again - “…An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary…”

Global markets see red as Greece misses Troika 2012 deficit target....RBA announcement today AEDT 2.30pm rates expected to be on hold

Although the International Monetary Fund, The European Union and the European Central Bank (collectively known as the Trioka) has accepted the Greek governments revised planned deficit cuts from 6.5% of GDP to 6.8% of GDP in 2012 investor sentiment waned. These cuts were a significant part of the Greek governments efforts to secure austerity measures and prevent default and current market perceptions remain pessimistic that this is indeed possible. The Dow Jones slid 258 points closing at 10,655.30 - a 12 month index low and the Euro faced heavy losses moving to $US1.3238 at its worst point.

Positive manufacturing data in the US signalled growth was still occurring however all momentum was lost in the Euro Regions debt concerns. Local markets are expected to fall on the open this morning.

The RBA releases its minutes later today and although interest rate markets have priced in significant easings over the next 2 years the all important wording by Governor Glenn Stevens will indicate the reality of the situation heading towards year end. The cash rate is broadly expected to remain at 4.75% today however the possibility of a rate cut in 2011 is growing.

Germany agrees to increase austerity measures and positive US data eases the Friday tension

Any planned increase to the European Financial Stability Facility (EFSF) seemed to hinge on last nights German parliamentary vote as Chancellor Angela Merkel put forward her case to both sides of the lower house. Thankfully the dissidents remained silent and Germany became the 11th European country to ratify the proposal made back in July.

In the US positive economic data on unemployment and growth helped the markets rally to end in positive territory. The US economy grew in the second quarter beating expectations and rising 1.3%. Jobless claims also fell more than expected to 37k.

Closer to home we are expecting mixed signals through the August Private Sector Credit numbers released mkt +0.2% for the month and +2.8% YoY and house price data is expected to decline. Wayne Swan will also deliver his final Budget figures for 2010/11.