Solid gains were to be seen across the spectrum on Friday and there were two reasons for that. A stronger jobs report in the US (163,000 versus 100,000 expected), and news that Spain might approach the European bailout funds for aid. Recall that the European Central Bank made this a precondition to outright bond buying, and having initially said they wouldn’t go down that path, the Spaniards have indicated they now will.
The impact on Spanish and Italian bonds was significant, with 10-year yields down about 40 bps in the case of Spain to 6.82 per cent and roughly 24 bps for Italy. Risk on and European markets in particular had a strong session, with the Dax up 3.9 per cent and the CaC up 4.4 per cent. US indexes were up about 1.7 per cent and 1.9 per cent respectively on the Dow and S&P500. All in all then it should be a good day for the All Ords today and the SPI suggests we can expect something in the order of 1.4 per cent.
Back home the impact this will have on the Reserve Bank of Australia is significant. I suspect that the more positive news flow will add to the overwhelming case to keep rates steady at this meeting, and disarm those who would like lower rates. More generally, the RBA’s actions – cutting rates with no domestic cause – shows that every meeting is live though, so we can’t completely write this meeting off.
To see this, think about the factors that have driven the easing cycle so far. Weak domestic growth? No – growth has consistently been strong. A material change in the global economic outlook? No – most forecasters, including the IMF (who have been generally bearish), expect global growth around trend. That hasn’t changed.
So, the domestic economy is strong and unemployment low. Global growth is at trend and expected to remain so. What was driving rate cuts? As I have highlighted before, it was a combination of political and industry pressure and of course fear.
The problem with this as the key determining factor is that it involves a highly subjective assessment of the landscape – fear of what might be, not necessarily what is – which is far to easily influenced by the short-term press of the day. It’s arbitrary. Don’t forget that the board and most domestic analysts couldn’t even get what should have been an objective assessment of the domestic economy right. What faith should citizens have that the subjective assessment of the risks are correct?
Many argue that with domestic inflation contained, the risks are few. Certainly it’s true that domestic inflation has moderated and this has eliminated the need for rate hikes. But it is a serious error of analysis to suggest that inflation is the lowest in decades and that pressures are contained. Remember, these are the same people who were telling you last year and even this year that growth was weak. And the mistakes they made then are the same they are making now – a lazy reliance on the headline figures. The analysis is far more complex than that and the sheer volatility of core CPI should indicate to analysts that this is the case.
That said, in the right news environment, the board will use ‘soft inflation’ as an excuse to cut, just as they used a fraudulent assessment of domestic economic weakness to cut rates last year. We know from their own public commentary, that many board members are predisposed to cut. That is their bias despite Australia’s strong growth metrics, which they have consistently ignored. Certainly the government has made it’s case plain for this meeting and wants lower rates, as does Roger Corbett it would appear. I just don’t think they’ll be able to swing it at this meeting though, given the recent turn of events. It’s just as well rate cuts have generally been followed by deterioration in confidence and I have highlighted the reason for this before. It makes it harder for people to accept the good economic data with policy makers panicking as they have.
Outside of the Reserve Bank there are a few bits and pieces for Australia. It's earnings season of course and then for the data, we get TD’s inflation gauge and ANZ jobs ads today, home loans on Wednesday and employment on Thursday. Analysts expect a 10,000 lift in jobs with the unemployment rate forecast at 5.35 per cent from 5.2 per cent. On Friday, we get the RBA Statement on Monetary Policy. I suspect growth will be revised up and inflation forecast will remain unchanged.
Globally it's reasonably quiet in the US. We get two speeches from Bernanke (on Monday and Wednesday night), and then productivity and trade numbers on Thursday night. That’s pretty much it apart from the usual weekly indicators – jobless claims etc. For Europe we can expect German factory orders on Tuesday and then Wednesday sees trade and industrial production. Finally, it’s a big data week for China as well, with inflation and industrial production figures on Thursday, while on Friday we get trade figures.