SCOREBOARD: French fright

Tumult in Europe following Francois Hollande's presidential win will continue to put the stick to risk.

The face of Europe is changing, with the Socialists in France under Hollande looking to have won French presidential elections at the weekend. The Greeks don’t seem to know who they should have voted for. Latest reports suggest that no party has enough seats to rule in its own right.

The two major parties might be able to continue a coalition with a one-seat majority, according to exit polls, but that’s all we know so far – they might not. Chaos reigns, but the intervening uncertainty is unlikely to be good for risk.

The Australian dollar and euro have followed a similar path this morning, spiking higher initially, before news out of Europe saw both units slump. The Australian dollar is at $US1.0154, which is about a cent lower than on Friday night. Similarly, the euro is down over 1 cent compared to Friday, at $US1.3009, and that’s before the worms come out of the woodwork. Be prepared to hear the usual drum beat about how the European project was always doomed to failure. The ratings agencies will probably pounce and downgrade someone and then of course the US jobs figures on Friday show the economy slipping into a double dip. Stall speed. Okay maybe not, but because they were weaker than expected at 115,000 (versus forecasts for 165,000) so it's risk off. Fact is, jobs growth in prior months was revised up and the unemployment rate fell to 8.1 per cent from 8.2 per cent. Looking through the volatility, monthly jobs growth in the US has averaged about 200,000, or 2.4 million annualised. Strong. Talk of a jobs slowdown is misplaced and meaningless at this stage.

But none of the above is exactly inspiring stuff and there isn’t a lot in the way of major US economic data this week. So it’s not looking like markets will have the best of weeks this week. The All Ords will likely be hit hard today. Anyway as for the US data, we kick off with consumer credit tonight and, by the by, be aware that consumer credit is surging. Following three months of near record high growth, credit settled down to a still above average $8 billion pace in February. Other than that though we get the trade balance on Thursday night and producer prices Friday night. It’s light and so there isn’t a lot to distract the market from the now – and expected – heightened uncertainty.

In contrast it’s a massive week for Australia this week. Of course there will be endless amusement provided by the Commonwealth budget – out Tuesday night at 1930 AEST – especially as there is all manner of speculation as to how tough and tight it’s going to be. Recall that Swan has said this before, and without fail the budget has been much less dire – a non-event even. The government is unpopular, we know this, and they face almost certain defeat at the next election, according to every poll. Is it really going to be tough and tight? I suspect that this budget will be used to set the stage for some serious vote buying next year. The ALP is desperate. Would they want to annoy an already annoyed electorate? I doubt it.

So I suspect the government, rather than cutting expenses per se, will rely on attacking ‘rich people’ ie middle class families, strong GDP forecasts and recent RBA rate cuts to raise revenue and maintain the surplus. The Australian Tax office will be unleashed – "protect the revenue base” they will be told, and so there will probably be a pick-up in acts of pain inflicted by tax department officials. If you are targeted by the ATO fight them, be sure to inform your local MP, lawyers, accountants and especially the media.

Outside of the budget there is a run of other data to watch as well. Today for instance, at 1130 AEST, we get NAB’s monthly business survey, the ABS monthly retail sales survey and building approvals. This monthly retail survey is limited in its use for gauging the economy, as it has for a long time now been showing sales growth at a much weaker pace than either company accounts or the national accounts and in my opinion should be scrapped (they could use the savings to bring in a monthly CPI). I’ve also found the seasonal factors being used have been very generous in some months, which has the impact of dampening sales growth. Very small changes in seasonal factors (the estimation of which is more art than science) leads to very large changes in month-on-month growth rates. So for mine, this survey is of limited use in analysing the economy. It has been used however, to argue that retail have been weak. That is not the case – the trend growth is still the best estimate at the moment. For what it’s worth, economists expect growth at 0.2 per cent for this month.

As for the labour force data out on Thursday, the market looks for a 5,000 fall in employment following a strong 44,000 increase in March. The unemployment rate is forecast at rise to 5,300. This will be an interesting one for sure.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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