• US deflation outlook not positive for growth.
• RBA spends time on the sideline.
• Earnings season stokes risk appetite.

Deflation. It’s the current buzz word doing the rounds of the market as a Japanese style stall in growth is of serious concern for the US economy. Recent events have seen a sizeable amount of risk being taken off the table as we have gone through a few rounds of debt crisis courtesy of Europe. Further reducing risk, the results of the bank stress tests saw that the anticipated shock and awe was replaced by a lost opportunity for banking reform. This has left the comparative economic fundamentals naked in the wind and despite it being the summer in the US, the economy there isn’t looking so hot. The real concern is that the excess capacity and stubborn unemployment figures will continue. US Fed Chairman Ben Bernanke said last week that wage increases would result in greater consumer confidence however this is the same Fed Chairman who said in 2007 that “the impact on the broader economy and the financial markets of the problems in the subprime markets seems likely to be contained”. The data out yesterday saw US Consumer Confidence fall from negative 45 to negative 50. At 10:30pm this Friday, US Non-farm Payrolls will be released and we’ll be aiming for a recovery after last month’s slide.

Locally, the data has been a mixed bag with House Prices and the Trade Balance both better than expected while Building Permits and Inflation were both down. Recent data has given the Reserve Bank room to breathe and this week saw the central bank keep rates on hold at 4.5%. This provided welcome relief to retailers and home owners however despite the lack of support from the RBA, the local currency was already trading sharply higher on Monday morning. This was after the Chinese Purchasing Manufacturing Index figure of 51.2 showed growth despite concerns that there would be a figure of less than 50 which represents contraction. Manufacturing also performed well locally with the AiG Performance of Manufacturing Index at 54.4. Governor Stevens indicated that there is little reason to move rates higher, noting that “with growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate.”

US earnings season rolls on and the S&P 500 has climbed another 1% over the last week. Leading the charge were health-care companies such as Pfizer, which recorded better than expected earnings figures. The S&P500 has rallied close to 10% since the beginning of July and this has provided a floor for risk appetite amidst a climate of weak economic data. This has been a boon for currencies tied to growth such as the AUD, as when global equities falter you’ll see safe haven and low growth currencies such as the USD and JPY put on weight.

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