OECD predicts continued economic disruption…Moody’s warns entire Eurozone may be re-rated…MyState and The Rock merger creates 7th biggest non-bank app

The Australian economy has been predicted to grow by 4% in 2012 in the latest OECD report delivered overnight. While most nations economic expansion has been revised down over 2012 Australia is expected to benefit from exports growth and relatively low unemployment. Europe however “appears to be in mild recession” according to the OECD chief Economist who also fears that without a concerted effort on the part of Europe’s political leaders the euro zone may wallow ''into deep recession with large negative effects for the global economy''.

Moodys has also warned that rising cost of funds and continued destabilising effects on markets within the euro zone will no doubt give rise to eventual re-ratings on exposed sovereign debt in the region. Short-term implications may have ''negative repercussions for the credit standing of all EU sovereigns'' as action maybe taken as soon as early 2012.

Shareholders of The Rock Building Society have resoundingly voted in favour of the proposed merger with MyState which will see the Tasmanian based Credit Union own 78% of the merged entity. The Rock will operate as a distinct brand but must be treated as part of a merged entity for investment purposes. With $2.2bn in deposits and $2.85bn in loans the new institution becomes Australia’s 7th biggest non-banker financial services provider

Italian bonds upcoming test

With US markets closed last Thursday most of the action centred around Europe for the close of the week. Italy faces a difficult day ahead with Euro8.75bn of bonds to sell maturing from 2014 to 2023. An auction of Euro8bn worth of 6 month paper last Friday saw investors demanding 6.50% yield, almost double the result in Octobers auction.

The press has reported that the IMF and ECB are moving quickly to create a Euro600bn bail out plan for the beleaguered nation.

Thanks Giving Holiday provides a little reprieve

With US markets closed last night European losses were limited. German Chancellor Angela Merkel reiterated her opposition to joint “euro bonds” pushing the bond yields of the PIIGS group of nations higher.
The French President and new Italian Prime Minister also conferred that the EU treaty proposals would be put in place prior to the 9-10 December EU summit.

Markets buffeted overnight as “Supercommittee” Stalemate becomes a reality...Moody's cautions France

The US Congress Supercommittee entrusted with reducing the nations deficit announced “…it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline…”
This means that automatic spending cuts will be enforced in 2013 post next year’s election.

Europe also faced a volatile session with news that the ratings agency Moody’s cautioned that France’s Aaa rating could be undermined by rising borrowing costs, Eurozone debt crisis contagion risk and slowing growth forecasts.
French stocks lost over 3% on the news.

A new Government for Spain and a US stalemate may give rise to a volatile packed start to the week

Spain has ousted the ruling Socialist Party and provided a convincing victory for the conservative Popular Party over the weekend. The emphasis will be on the incumbent Popular party to provide decisive legislative process and regulation to steer the Spanish people away from the looming and persistent debt crisis engulfing the region.


The US is facing its share of turmoil once again as the US Congress Supercommittee seeks to bring about a deal before Wednesday in order to stave off potential enquiry into ratings downgrades for the worlds most influential country.

European woes continue as norrowing costs rise...Aussie battler back to parity

Spain's Euro5.5 billion auction of 10 year government bonds last night prompted investors to push yields ever closer to the 7% mark with an issue yield of 6.975%. The previous auction back in October cleared at 5.40%. The significant increases to the regions borrowing costs has weighed down on global markets over the past week pushing stock markets lower and driving commodities and related currencies lower. The Australian dollar this morning was hovering around US1.0000 and gold was down 2.9%.

Investor confidence in Euro Zone waivers….RBA reveals close call in November Board Minutes

Borrowing pressures mounted in the Euro Region overnight as investor confidence waivered as reported by German and Eurozone ZEW surveys. Persistent low growth expectations over the coming months is driving a real fear of recession in the region and whilst funding costs continue to rise the contagion risk becomes a more material proposition amongst neighbouring nations..


The RBA released its Board Meeting Minutes for November, which revealed their thoughts determining a cash rate easing of 25 basis points down to 4.50%. Members of the Board weighed up “an improved picture for inflation” against the “expansionary effects of the high terms of trade” ie a rates on hold scenario versus a cash rate easing. Significantly they also noted that if the world economy “turned down in a serous way” that would lead to a case for an easing. The question in December now becomes what is a “serious way” in light of Europe’s’ current turmoil….

Markets falter on Italian Bond Auction...RBA November Board Minutes released today AEDT11.30am

Although an almost one and half times bid cover ratio was achieved last night for the Euro3 billion 5 year Italian Government Bond auction by investors, markets watchers were worried at the sizeable increase in yield required to clear the issue. Within a month of the last auction taking place the yield on 5 year Italian bonds has jumped almost 100 basis points. The concern for the region persists with Spanish bonds also facing the affects of contagion fear and cost of funding increases.

The RBA releases its Board Meeting Minutes for November which will reveal their thoughts in easing the cash rate down to 4.50% earlier this month.

Investors support Euro Zone proactivity

Mario Monti has been confirmed to lead the Italian Unity Government as Italian Prime Minister Silvio Berlusconi steps aside. Monti has strong credentials as a long-standing economics professor and received convincing EU support as the chosen replacement and investors pushed stocks higher in appraisal.

Tomorrow the RBA releases its Board Meeting Minutes for November which will reveal their thoughts in easing the cash rate down to 4.50% earlier this month. Governor Stevens will be speaking on Thursday and no doubt reiterate the Boards outlook for the remainder of 2011.

Cost of funding increases for Italy....Stable labour market data may see RBA content with neutral stance

Italy faced an important test overnight with the issue of 5 billion Euro 1 Year T-Bills. The cost to issue the relatively short term funding topped 6% and adds to the ever increasing burden od debt the country faces - now 120 per cent of GDP. The strong bid cover ratio eased market tensions however the 5 year bond issuance next Monday will be a key support indicator for the region.

October labour market data released yesterday was little better than expected with revised figures pushing the unemployment figure back down to 5.2%.

Markets jittery on Italian bond yields

Pressure mounted overnight as the burden of the Italian sovereign debt crisis further bellowed bond yields out to a seeming untenable 7.5%. These levels reached by the governments 5 year bond are over ~150 basis points over the yields Ireland, Portugal and Greece all required EU assistance. Italy has the world’s third largest debt encumbrance and continued pressure on prices will surely require intervention to once again contain the escalating crisis in the Euro Region.

In local news the Australian Consumer Sentiment for October was buoyed by the RBA 25 basis point easing climbing 6.3%. Today we have October labour market data with market consensus seeking a rise in overall unemployment to 5.3% from 5.2% as the economy struggled to add an expected 10k jobs.

Italian Prime Minister Silvio Berlusconi steps down…New PM for Greece

Outgoing Italian Prime Minister Silvio Berlusconi has agreed to submit his resignation post the parliamentary approval of the EU negotiated austerity package. Berlusconi has been defiant in his reign over the people of Italy but it is believed that a struggle to achieve an ordinary parliamentary vote yesterday was the ultimate show of lack of confidence displayed by the countries constitutional representatives.

Greece has decided on former European Central Bank vice – president Lucas Papademos as incumbent Prime Minister for the beleaguered nation. European stock markets were buoyed by the news our of Greece and Italy however bond markets edged into weaker territory as the real issue of growing sovereign debt in the region is played out.

European focus moves to Italy...US supports overnight markets

As concern spreads from Greek politics to the state of politics in Italy the ensuing European Sovereign debt crisis keeps mounting. Investors remain wary of the region shying forcing bond yields ever higher. Positive US unemployment data last Friday and continuing signs of US consumer credit improvement last night has helped stave off the negative effects of the EU region.

Europe remains a challenge...RBA reassess growth and inflationary expectations

News this morning has emerged that the Greek Prime Minister Papandreou will step down following the formation a unity government who will be tasked with administering the countries austerity measures going forward. Global markets continue to feel the unease in the region and will react accordingly in the short term with expectations of further market turbulence this week. Italy agreed to systemic quarterly reviews by the IMF and EU as part of adherence to their financial stability package.


The RBA’s release of its Quarterly Statement on Monetary Policy on Friday has highlighted a slower than expected growth forecast for the remainder of this year both domestically and internationally. This cautious approach provides room for further easings after the RBA returned to a “neutral” cash rate position last Tuesday. Underlying inflation projections were lowered over 2012 and are not expected to fall within the RBA’s 2.5-3% target band until the latter half of 2013.

Greece backs down on referendum plans...RBA Quarterly Monetary Policy released at 11.30am AEDT

The Greek Prime Minister last night about faced on his proposal to take the latest EU approved austerity measures direct to a public vote. He qualified his earlier shock announcement by acknowledging the vote was now not necessary as the nations political opposition party has agreed to accept the deal struck at the latest EU Summit last week. Stringent fiscal policies will be enforced in return for a writedown of Greek debt repayments.

Locally the RBA releases its Quarterly Statement on Monetary Policy this morning providing insight into their view on key metrics of employment, growth and inflation.

FED lowers growth expectations and opens the door for QE3

The two day sitting of the FOMC this month produced as expected no change to the official Fed Funds Rate. Chairman Bernanke cited obvious concerns for the continuing troublesome situation out of Europe and its potential effect on investor confidence and growth in the US. "...We remain prepared to take action as appropriate to make sure the recovery continues.." however no plans were laid out for quantative easing plans at this point. Bernanke also voiced concerns for the continuing high unemployment the nation is battling predicting 8.5% in 2012.

Shock Greek Referendum throws Europe back into uncertain times… RBA cuts official cash rate to 4.50%

The Greek Prime Minister has thrown the embattled Euro Zone into disarray once again after announcing plans to take the agreed austerity measures to the nations public in a vote. European Leaders are furious with PM Papandreou as the EU Summit has worked hard over the last few weeks to provide stability to the region and global markets.

In local news the RBA announced a return to a more “neutral” monetary policy stance citing the easing pressure on inflation and the continued weak household sector as allowing the opportunity to ease the cash rate by 25 basis points. Once again the timing may be just right given overnight developments in Europe.

Bid tone continues as a result of "European Euphoria" however all eyes on RBA close call tomorrow

The optimism out of Europe late last week saw most markets support positive territory at close on Friday with the Australian Dollar a substantial beneficiary. $US107.50 is a significant mark at the moment and will be tested over the course of the day ahead of the RBA Board meeting tomorrow.

11 out of 17 economists surveyed by AAP are predicting a 25 basis point reduction in the cash rate announced tomorrow afternoon AEDT2.30pm. A weaker than anticipated underlying CPI release over Q3 2011 and the continuing cautious household sector indicates a weaker domestic economy however a strong push in the Unemployment headline figure and a resolution in Europe may see the RBA lift their growth expectations for 2012 and negate the need to ease the cash rate.

Once again a tough decision for the RBA to make and perhaps prudency and time are the Boards’ strongest allies – as with the case back in August.