Macroeconomic Risks Abound
02/12/08 22:06
RBA Cuts Rates to 4.25% - Ref: UBS
Risk sentiment deteriorated further amid the unsurprising, but official confirmation for the US being in a recession, less constructive commentary by Fed Chairman Bernanke, and poor macroeconomic data. According to the National Bureau of Economic Research (NBER) the current recession began in December 2007, due in large part to the decline in jobs. The recession is likely still ongoing, as recent data has been getting worse. Fed Chairman Bernanke highlighted that the US economy remains under considerable stress and that more rate cuts are possible. He also noted that the scope for reductions to aid growth remains limited at this point. Bernanke alluded to quantitative easing (QE) like policies such as buying longer-dated Treasurys and agency debt as a way of injecting liquidity. His comments, while not explicitly mentioning QE, drove down long-term yields, consistent with the experience in Japan when it engaged in QE. The 2y Treasury yield is 0.88% and 3.22% on the 30y Treasury. The 2s10s Treasury curve is now 183bp, down from the mid-November high of 262bp. On the data front, the manufacturing ISM for November fell another 2.7 points to 36.2, following sharp declines in October and September.
Risk sentiment deteriorated further amid the unsurprising, but official confirmation for the US being in a recession, less constructive commentary by Fed Chairman Bernanke, and poor macroeconomic data. According to the National Bureau of Economic Research (NBER) the current recession began in December 2007, due in large part to the decline in jobs. The recession is likely still ongoing, as recent data has been getting worse. Fed Chairman Bernanke highlighted that the US economy remains under considerable stress and that more rate cuts are possible. He also noted that the scope for reductions to aid growth remains limited at this point. Bernanke alluded to quantitative easing (QE) like policies such as buying longer-dated Treasurys and agency debt as a way of injecting liquidity. His comments, while not explicitly mentioning QE, drove down long-term yields, consistent with the experience in Japan when it engaged in QE. The 2y Treasury yield is 0.88% and 3.22% on the 30y Treasury. The 2s10s Treasury curve is now 183bp, down from the mid-November high of 262bp. On the data front, the manufacturing ISM for November fell another 2.7 points to 36.2, following sharp declines in October and September.
The renewed decline in equity markets is a reminder that macroeconomic risks abound and we still think that we are in a broader de-leveraging environment.
AUD: RBA cuts rates by 100bp
Australian developments this morning were marginally positive for the Australian dollar, despite the RBA cutting rates by 100bp. Australian retail sales rose by 0.7% m/m in October on a seasonally adjusted basis, following a contraction of -1.1% m/m in September. Meanwhile, the current account balance for Q3 showed a contraction in the deficit to A$9.74 bn, less than expectations of -11bn, and the lowest current account deficit since Q1 2003. Of course a rapid contraction in the current account deficit is consistent with de-leveraging as it implies less borrowing from abroad. From that perspective, we would not argue for an improved AUD outlook simply because the current account deficit has narrowed. More important is the bounce in retail sales, suggesting that households are not abruptly clamping down on spending. The RBA cut rates by 100bp as expected today. However, their statement did not explicitly signal a need for further rate cuts. This caused bill futures to sell-off initially, but clearly uncertainty over next year for central bankers and investors alike remains very high. Tomorrow we have GDP for Q3. On Thursday, the RBNZ meets and will also likely cut rates aggressively.
JPY: New measures to widen access to credit
The Bank of Japan concluded an emergency policy meeting overnight, and as widely expected, the central bank said it would widen the range of corporate debt as eligible collateral in their money-market operations, specifically including BBB-rated debt in addition to the original criteria of A or above. Interest rates were kept at 0.30% and were not the main focus of the meeting. The BoJ said it would adopt some new operations using corporate debt, which offer up to 3m term funding until end of April at the overnight call target rate. This is the latest in a series of measures designed to alleviate stress in credit markets but does not mark a dramatic change in monetary policy. The wider economy is being affected by a sharp drop in global demand and the government is expected to apply the fiscal taps once again to help mitigate the damage to the economy. With risk aversion ticking up again we continue to see a firm JPY.
EUR: Further easing in rates expected
The most recent macroeconomic data remains indicative for further deteriorating growth conditions and easing inflation pressures. Eurozone PPI continued to move lower from the July high, with the latest reading at 6.3%y/y (cons 7.0%, prior 7.9%) At -1.6% m/m (cons 0.5%, prior -2.3%) German retail sales came in considerably lower than expected, and the zone-wide manufacturing PMI for November has been confirmed at multiyear lows, pointing to further stress in business activity. Inflation, in contrast, remains on the back-foot, and both further decreasing growth expectations and the stable downtrend in energy prices supports that development. As such, our economists now expect the ECB to cut rates by 50bp on Thursday. Although the ECB has been conservative in applying a more expansionary stance on monetary policy in the last few months, the latest drop in CPI combined with no immediate signs of any soon pickup in activity will likely keep the ECB fully focused on growth for now. On the policy side, Eurogroup Chairman Juncker highlighted that monetary policy alone cannot produce an adequate response to the current crisis, pointing out the need for a timely application of fiscal stimulus. In addition he highlighted that November's economic forecasts are outdated by now. On the data front, Producer Prices for October is the only notable release.
CAD: Harper government on the brink
The Canadian dollar fell in the late North American session as reports emerged that a bloc of opposition parties would form a coalition to topple the Harper-led Conservative government. The coalition includes the Liberals, New Democrats and separatist Bloc Quebecois. The Liberals, which are Canada's main opposition party, said that party leader Stephane Dion will be prime minister. In a letter to the Governor-General, the new coalition has stated that the opposition parties have lost confidence in Harper's government. A motion of no-confidence in the House of Commons at the earliest opportunity looms (likely on December 8th), which under normal circumstances would automatically lead to the dissolution of the 40th Parliament of Canada. However, given Canada just went to polls on October 14th, the aim of the coalition letter was to call upon the Governor-General to use her constitutional powers to ask the opposition to form a government before calling new elections. Prime Minister Harper has already questioned the legitimacy of such a move he branded "an affront to Canadian democracy". Harper may choose to ask Governor-General Michaelle Jean to prorogue parliament (end the parliamentary session without dissolution) to escape a confidence challenge, prolonging political uncertainty. The opposition parties have justified their manoeuvre on the basis that they argue that the Harper Government has not been doing enough to address the ongoing financial crisis. The partners have signed an agreement that they will remain together until at least mid-2010 and will provide fiscal stimulus, likely pushing Canada's budget into deficit. The political uncertainty will no doubt add to pre-existing downward pressure on the CAD, especially with governmental survival dependant on a separatist political party. CAD movement above 1.3100 should present an opportunity to sell.