Modest gains were the order of the day on Wall Street on Friday night, reflecting a better-than-expected ISM result. This is a good survey, well-respected, and it suggests the manufacturing sector accelerated in February to 54.2 from 53.1 and an expectation of 52.5. Also helping, I guess, was a lift in consumer confidence to 77.6 from 76.3 and further reassurance from Fed Chairman Ben Bernanke that there was no way he was about to ease off policy stimulus – although he did try to reassure people that rates wouldn’t remain low forever. And thus the S&P500, Dow and Nasdaq were 0.2-0.3 per cent higher – our own SPI was down about 5 points to 5069.
Now, it’s a busy one this week, but how it all interacts on market sentiment is anyone’s guess. Overlaying macro dataflow is the surprising uncertainty over the Italian election. That it happens every single time seems to have caught some people out. Then of course there's the sequester. We’ve gone over that cliff (cuts started from Friday) and talks that day came to nothing. In fact, the House Speaker John Boehner said he didn't see a way out of the sequester. That’s two sentiment-sapping influences just there.
So, given some of the other ridiculous or outright fictitious reasons the Reserve Bank of Australia board has nominated to cut rates, the sequester and further European uncertainty may prove sufficient to see the board cut again this week (the decision is due at 1430 AEDT on Tuesday). We can never truly rule it out. Having said that, 27 of 29 economists surveyed by Bloomberg expect rates will remain on hold, and beyond that most are expecting only one more rate cut, if that.
The general view is that the global economy turned out not to be anywhere near as bad as thought. The domestic economy is travelling well and certainly last week’s CAPEX survey should have been the final nail in the coffin. It’s quite clear our economy doesn’t need record low rates. My only reluctance to celebrate the end of the easing cycle stems from the fact that so many people want to target a lower dollar. Not that it’s overvalued or anything, but unfortunately there are just too many business leaders who lazily rely on corporate welfare and government to do their jobs for them.
As an aside, I spoke to one investor at the weekend who said he was sick and tired of going to presentations and listening to chief executives or chief financial officers stand up and make excuses as to why they weren’t doing anything. The world is too uncertain and scary, the Australian dollar is too high, interest rates are too high, etc. This investor correctly noted that these guys weren’t paid to make excuses and outline why they weren’t doing anything – i.e. investing – to advance the future of the company. Their job was to come up with solutions and act. To make money for shareholders and think longer term.
Now, Richard "Dicky” Dawkins might think that universes and foreskins spontaneously create themselves out of nothing, and many business leaders probably rely on this theory to maximise shareholder return. But the Great Bard begged to differ. "Nothing will come of nothing”, he wrote, and unfortunately the laws guiding earnings and profit growth tend to follow that maxim – no spontaneous self-creation evident as yet. Nothing indeed comes of nothing it seems and it’s high time Australian business stopped whinging and started thinking about how to deal with reality.
Why does this matter for Reserve Bank policy deliberations? Because while some large business whinge, and while they have friendly ears (read: people on or seeking board positions), there is always the scope for further cuts regardless of the risk/reward trade-off for the nation. I don’t think the debate is over then.
Outside of the Reserve Bank there is some big hitting Aussie data: company profits (today), building approvals (Jan data and today also), balance of payments (Tuesday), retail trade (Jan data and Tuesday) and the main one, December quarter GDP on Wednesday. The consensus is that GDP rose a respectable 0.6 per cent in the quarter, which isn’t a bad result.
Looking abroad, the key US data is payrolls on Friday. February data and the market is looking for a gain of about 167,000. A result like this is well above the pre-GFC average and strong growth. Gains like that will see the US unemployment rate closer to 7 per cent by year end than its current rate of 7.9 per cent (expected to remain unchanged in February).
Otherwise, we get non-manufacturing ISM on Tuesday night, factory orders Wednesday night and the Beige Book Thursday morning. It’s also worthwhile noting the European Central Bank and Bank of England hold their policy meetings this week, although no changes are expected at this meeting. Recall that the BoE has signalled the likelihood of further quantitative easing and we know its new governor is more than keen to get the printing presses going.
Finally also, Chinese trade and German industrial production are worth keeping an eye on.
Have a great week…