SCOREBOARD: Stay the course

From my read of the RBA governor's speech (out late yesterday afternoon), it seems that the bank does indeed think the economy is still growing around trend, looking at a broad number of indicators. And that's even with the weaker fourth quarter GDP numbers – which as regular readers know, I put down to volatility.

Some suggest that this is still not good enough; and Stevens himself notes that the "economy is not so good that it cannot be improved”. But he seems to place the emphasis for that on adapting to structural change and on improving productivity. There is a role for monetary policy to support demand, but the governor said this depends on the performance of inflation, and we know from the most recent Statement on Monetary Policy that the bank sees the risks here as evenly balanced – which they are. It was interesting to see the RBA note, as I have, that pessimism in Australia seems overdone.

That Stevens went on to discuss the limits to monetary policy both in lifting trend growth, which it cannot do, and in targeting the exchange rate, gives a hint as to where the policy preference lay. And certainly regular readers will know I think this is the right way to think. So it seems that unless non-tradable inflation comes down, productivity improves sharply, domestic demand slows materially, or the world implodes; then the RBA is on hold and that is my call. On my current global and domestic economic forecasts, I still expect the bank to hike rates by 25 basis points later this year.

The world the way I see it is improving rapidly – the downside risks, while still with us, have diminished markedly and market moves are reflecting this. The US Treasury curve for instance steepened again last night. From 1630, the 10-year yield rose 6 basis points to 2.36 per cent which is the highest yield in about five months. The 2-year rose 2 basis points or so to 0.37 per cent (highest in seven months), while the 5-year was up a bit over 5 basis points to 1.176 per cent. Aussie futures, having rallied into yesterday's close, then sold off sharply overnight, the 3s down 8 ticks from the high (5 ticks or so from the close) to be at 96.16. The 10s were down almost 10 ticks from the high to 95.63 (down six from the close).

US equities then managed to push higher, boosted by improving global sentiment and a plan by Apple to buy back stocks and pay out a dividend. Up from the open, the S&P rose 0.7 per cent at the high but eased into the close to finish 0.4 per cent higher (1409). The Dow was flat effectively (plus 0.05 per cent to 13239), while the Nasdaq rose 0.8 per cent to sit at 3078. The Aussie SPI rose 0.07 per cent to be at 4316 while stocks on the major European indexes were all marginally weaker – Dax off 0.05 per cent, CaC down 0.5 per cent and the FTSE finished 0.07 per cent lower.

In the forex space the euro shot up over a big figure to 1.3240 but the price action otherwise wasn't too exciting. The Australian dollar was little changed from 1630 AEDT at 1.0606 (high of 1.0636), sterling was 50 pips or so higher at 1.5894, while yen was little changed at 83.34. As for commodities, gold was up smalls to $1663, silver rose 1 per cent while copper rose 0.7 per cent. WTI then rose 0.8 per cent ($108) and Brent fell 0.2 per cent ($125).

Not much in the way of news or data flow. New York Fed President Dudley said that the Fed hadn't decided yet on QE3 although it remained an option. Dallas Fed President Fisher then said there is nothing left to do and there is plenty of liquidity.

Looking at the day ahead, we get the RBA's minutes at 1130 AEDT, but given the RBA governor's speech last night I think we pretty much know where the bank sits. At 1405 AEDT an assistant RBA governor gives a speech to the Cards and Payments conference and that's pretty much it for our region. Tonight it's worth watching German producer prices, UK CPI and US housing stats. Bernanke also gives a lecture (one in a series of four).

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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