Then we saw the People's Bank of China cut the reserve requirement by 50 basis points to 20 per cent for the major lenders, while smaller banks have a ratio of 16.5 per cent. This shouldn’t be taken as a sign that the Chinese authorities are overly concerned about growth. The reserve requirement is more a liquidity lever (to deal with high forex reserves) than anything else and if the government truly wanted to stimulate the economy, they would take more direct action. Note that lending rates for instance, haven’t been changed in a year, from when they hiked. Nevertheless, the move did see the Australian dollar push modestly higher (now at $US1.0038).
Now on the European front we also got some good news, not so much from the Greeks who are probably going to have another election unless the former coalition partners can get two more votes by this Thursday. I guess there is some good news in that polls show about 80 per cent of Greek citizens wish to remain in the euro, so there is certainly no mandate for them to leave. But it was Spain’s banks who offered the good news over the weekend. Recall that the government has said Spain’s banks need to increase provisions again property losses and also effectively said that public funds would be used to defend the financial system if needed, and it was needed when they took a 45 per cent stake in the nation’s fourth largest lender. Anyway a number of other banks, Santander, etc, came out on the weekend and said they would increase their provisions without this affecting capital ratios. A number of other banks suggested they would soon announce their increased provisioning, ruling out any need for them to hit the public coffers. Which is great, right? It’s going to be a confusing open this morning on the ASX.
Now on to the week ahead, there are a few bits and pieces worth noting for Australia. In terms of data it’s light; we get home loans today, car sales tomorrow and consumer confidence on Wednesday. Note, though, that consumer confidence hasn’t been giving any reliable signals of late. Confidence notionally has plummeted over recent months, and notwithstanding the 100 basis points of rate cuts that we’ve seen (not to mention the huge improvement globally) is lower now than what is was prior to the commencement of the easing cycle – when we were also dealing with end of world hysteria. That’s quite something, and probably has a lot to do with the failure of leadership that I’ve mentioned in the past. There has been a huge effort from various quarters to talk rates down but there has been a cost – confidence is shot. Luckily it has had very little impact on consumers’ willingness to spend and you’re seeing that in the car sales data, which are very strong, and retail spending data.
Outside of the dataflow we have two key RBA events – a speech from Deputy Governor Philip Lowe today at 12.15pm on "Developments in the mining and non-mining economies” and the RBA board's minutes tomorrow. To be honest I’m probably not even going to read the minutes. Recent dataflow shows just out of touch the RBA board members are – and they are completely out of their depth. Late last year, just after they cut, we found out that demand growth was at its strongest in four years. This time, just after they cut, we find out that spending has picked up sharply, that the unemployment rate fell to 4.9 per cent and that jobs growth was underestimated through 2011. It's very clear that economics is only playing a very small part in the board’s decisions. So who knows where rates will go. The data suggests up. The whisperings of the club suggest down. Best to go with the club at the moment and bet on lower rates at some stage – as ridiculous as that is.
It’s a busy one globally as well, and I don’t really have too much to add to the flow at this stage. But you can get a good run down of what’s out in The Week Ahead.
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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