SCOREBOARD: Beyond Greece
With Greece's 0.5 per cent of the global economy on the shelf for now, punters started waking up to decent growth and solid earnings elsewhere.
Risk appetite increased overnight as Europe became more forceful in its stance towards Greece. Short euro positions were unwound with the currency up a big figure. The US dollar index fell about 0.6 per cent (from 1630) and Australian dollar is up 70pips to 0.9007. Sterling is 80pips higher at 1.5789, while the yen sits at 90.11 from 89.86.
The word now is that Greece has a month to try and nut out a convincing deficit reduction plan, but Europe stands ready to help out if markets don't allow them the time they need. If I was trading sovereign CDS I'd be a little bit worried by now. Not only is a default highly unlikely, but heavy hitters on the European stage have been making noises about sovereign CDS. It's fair to say that they don't like it – and that given the European penchant for heavy regulation, political risks for that market must be very high if things (spreads) get pushed too far. That said, the EU did come out late last night and say that it won't be backing the US ban on proprietary trading.
So with 0.5 per cent of the world on the shelf for now, punters woke up to a world of decent growth and solid earnings. In the US, the NAHB index rose to 17 in February from 15, the Empire State manufacturing index surged to 24.9 from 15.96 in January and the German ZEW index showed a decent improvement in the current situation (economic sentiment fell marginally but remains well above the long-term average). Throw in a report from Barclays that they doubled their profit and the mood improved markedly.
Commodities got a sizeable boost from a weaker dollar and better data – oil up 4 per cent ($77.06), gold up $18 and base metals putting in a solid performance to rise 4 per cent on the LME.
All of this then flowed into equities – European stocks up between 1-1.5 per cent and the S&P500 up 1.8 per cent (1095). All sectors look to have picked up, positive earnings (Merck and Co) and takeover activity also giving the market a boost, tough basic materials, energy and financials outperformed. Lagging were healthcare, telecommunications and consumer goods. On the other indexes, the Dow was up 176pts to 10275, the Nasdaq rose 1.4 per cent (2213) while the SPI bounced 1.4 per cent (4597).
Despite all the positive news about, Treasury yields fell a bit. Trading within a comparatively narrow range (5-7bp), the 2-yr yield was down 3bp to 0.8 per cent, the 5-yr fell 3.9bps to 2.3 per cent while the 10-yr was off 4bps to 3.66 per cent. Aussie futures were little changed 3s down 3 ticks to 95.09 on a 9 tick range with 10s flat at 94.43 on a 6 tick range.
Regarding the RBA's minutes yesterday, it's fairly clear the decision to hold was completely arbitrary ('finely balanced') and again (as I've outlined elsewhere) I'm highly sceptical of the reasons they outlined for holding off – as most people should be unless they were forecasting the RBA to hold steady – which of course we know wasn't the case.
Sovereign risks were given a lot more prominence in the RBA's minutes than they were in the press release or the SOMP. Unfortunately, this gradual change in prominence doesn't sit well. Taking them at their word though, it displays a worrying flaw in their analytical approach – to be blinded by the 0.5 per cent of the world economy that is Greece (and the subsequent sovereign concerns).
That's because these are not issues which are going to be resolved in the near-term. High budget deficits and debt will be with us for a while yet. So, if concerns over sovereign risks were a reason to hold steady, then we could be waiting a very long time till the next hike – years in fact. Are we to expect the RBA to ignore ongoing strong domestic and global growth outcomes, to look through the facts and rely instead on fear – on the press of the day? I hope not.
The recent drop in the unemployment rate to 5.3 per cent and the 200,000 jobs created in the 5 months to January highlight why I'm concerned. So too do recent global and domestic growth outcomes; the fact that – in the RBA's own words – capacity usage is above the long-term average. Contrary to comments made in the RBA's minutes, the case to tighten was considerably stronger in February than the case to hold. That's why – I presume – the market (and every analyst) was forecasting a hike. It is concerning that the RBA cannot see this.
There are many things to be afraid of unfortunately, many things that could spook the RBA. Certainly they are much more reluctant to hike from here (despite the Bank's growth and inflation upgrades) and it is also unclear what they need to pull the trigger again. Everything is already in place for a hike – jobs, inflation, growth. Yet we hear in the minutes that rates will 'probably' go higher – it's a little bit casual. While the data makes a March hike a fait accompli, the picture is confused by the RBA's arbitrary approach to policy.
I suspect the March decision will then depend on the news flow and potentially stock market moves of the preceding week – until then it's a 50:50 call. However, with things such as the RBA's new-found caution and the IMF's ground work in getting central banks to lift inflation targets, whatever world we find ourselves in, inflation is going to be a big part of it. I've been making this point for a while and the Fed's Hoenig reiterated it last night – budget deficits and mountains of debt make it very difficult to avoid inflation. It makes if very difficult for central banks to lift rates. Just look at the UK last night. Headline CPI is at 3.5 per cent y/y in January, (the target is 2 per cent) and core inflation is at 3.1 per cent y/y. People keep playing down the numbers as being driven by one off factors, forgetting they are the same one-off factors which saw inflation moderate. With rates historically low the risk skew is obvious.
Looking ahead, today's dataflow includes Westpac's leading index at 1030 and DEWR's skilled vacancies index. Tonight watch out for the BoE and FOMC minutes with housing starts and industrial production also due.
The word now is that Greece has a month to try and nut out a convincing deficit reduction plan, but Europe stands ready to help out if markets don't allow them the time they need. If I was trading sovereign CDS I'd be a little bit worried by now. Not only is a default highly unlikely, but heavy hitters on the European stage have been making noises about sovereign CDS. It's fair to say that they don't like it – and that given the European penchant for heavy regulation, political risks for that market must be very high if things (spreads) get pushed too far. That said, the EU did come out late last night and say that it won't be backing the US ban on proprietary trading.
So with 0.5 per cent of the world on the shelf for now, punters woke up to a world of decent growth and solid earnings. In the US, the NAHB index rose to 17 in February from 15, the Empire State manufacturing index surged to 24.9 from 15.96 in January and the German ZEW index showed a decent improvement in the current situation (economic sentiment fell marginally but remains well above the long-term average). Throw in a report from Barclays that they doubled their profit and the mood improved markedly.
Commodities got a sizeable boost from a weaker dollar and better data – oil up 4 per cent ($77.06), gold up $18 and base metals putting in a solid performance to rise 4 per cent on the LME.
All of this then flowed into equities – European stocks up between 1-1.5 per cent and the S&P500 up 1.8 per cent (1095). All sectors look to have picked up, positive earnings (Merck and Co) and takeover activity also giving the market a boost, tough basic materials, energy and financials outperformed. Lagging were healthcare, telecommunications and consumer goods. On the other indexes, the Dow was up 176pts to 10275, the Nasdaq rose 1.4 per cent (2213) while the SPI bounced 1.4 per cent (4597).
Despite all the positive news about, Treasury yields fell a bit. Trading within a comparatively narrow range (5-7bp), the 2-yr yield was down 3bp to 0.8 per cent, the 5-yr fell 3.9bps to 2.3 per cent while the 10-yr was off 4bps to 3.66 per cent. Aussie futures were little changed 3s down 3 ticks to 95.09 on a 9 tick range with 10s flat at 94.43 on a 6 tick range.
Regarding the RBA's minutes yesterday, it's fairly clear the decision to hold was completely arbitrary ('finely balanced') and again (as I've outlined elsewhere) I'm highly sceptical of the reasons they outlined for holding off – as most people should be unless they were forecasting the RBA to hold steady – which of course we know wasn't the case.
Sovereign risks were given a lot more prominence in the RBA's minutes than they were in the press release or the SOMP. Unfortunately, this gradual change in prominence doesn't sit well. Taking them at their word though, it displays a worrying flaw in their analytical approach – to be blinded by the 0.5 per cent of the world economy that is Greece (and the subsequent sovereign concerns).
That's because these are not issues which are going to be resolved in the near-term. High budget deficits and debt will be with us for a while yet. So, if concerns over sovereign risks were a reason to hold steady, then we could be waiting a very long time till the next hike – years in fact. Are we to expect the RBA to ignore ongoing strong domestic and global growth outcomes, to look through the facts and rely instead on fear – on the press of the day? I hope not.
The recent drop in the unemployment rate to 5.3 per cent and the 200,000 jobs created in the 5 months to January highlight why I'm concerned. So too do recent global and domestic growth outcomes; the fact that – in the RBA's own words – capacity usage is above the long-term average. Contrary to comments made in the RBA's minutes, the case to tighten was considerably stronger in February than the case to hold. That's why – I presume – the market (and every analyst) was forecasting a hike. It is concerning that the RBA cannot see this.
There are many things to be afraid of unfortunately, many things that could spook the RBA. Certainly they are much more reluctant to hike from here (despite the Bank's growth and inflation upgrades) and it is also unclear what they need to pull the trigger again. Everything is already in place for a hike – jobs, inflation, growth. Yet we hear in the minutes that rates will 'probably' go higher – it's a little bit casual. While the data makes a March hike a fait accompli, the picture is confused by the RBA's arbitrary approach to policy.
I suspect the March decision will then depend on the news flow and potentially stock market moves of the preceding week – until then it's a 50:50 call. However, with things such as the RBA's new-found caution and the IMF's ground work in getting central banks to lift inflation targets, whatever world we find ourselves in, inflation is going to be a big part of it. I've been making this point for a while and the Fed's Hoenig reiterated it last night – budget deficits and mountains of debt make it very difficult to avoid inflation. It makes if very difficult for central banks to lift rates. Just look at the UK last night. Headline CPI is at 3.5 per cent y/y in January, (the target is 2 per cent) and core inflation is at 3.1 per cent y/y. People keep playing down the numbers as being driven by one off factors, forgetting they are the same one-off factors which saw inflation moderate. With rates historically low the risk skew is obvious.
Looking ahead, today's dataflow includes Westpac's leading index at 1030 and DEWR's skilled vacancies index. Tonight watch out for the BoE and FOMC minutes with housing starts and industrial production also due.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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