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• Local data provides momentum for inflation.
• It’s back to the future in Europe.
• Double dip concerns remain despite the green shoots emerging.

The local unit has had a stellar yet volatile run this week, as the Aussie has gained off the back of data both here and in the US, despite a significant amount of risk aversion flooding into the market. Most importantly the data here had the market speculating on when Governor Stevens & Co. might be forced into a rate hike. Two weeks ago, the market was pricing in a 10 per cent probability of a rate cut by the RBA this week, however a host of strong releases has seen greater pressure applied to the RBA to pare back growth. Last week we reported that GDP was particularly firm and this week we saw AiG Performance of Services Index (47.5), TD Securities Inflation (3%) and Home Loans data (1.7%) all stronger than expected. Furthermore, strength in consumer spending is not providing the stop gap the RBA would prefer to limit the resources led inflationary pressures. They noted on Tuesday that “private demand” was “firming” and this has prompted greater speculation that the RBA will continue the tightening cycle this side of 2011.

Since we mentioned last week about the flippant remark made by Axel Weber, there has been a new round of concern regarding the levels of sovereign debt held by the PIIGS of the Eurozone and as a result, sovereign debt yields there have again risen. The Wall Street Journal didn’t help the Eurozone when it ran a piece that undermined the recent bank stress tests as this prompted markets to pull out of European sovereign debt.

The US had a week that could easily be described as the “fits and starts” of economic recovery. Amidst some poor economic data, ISM Manufacturing (56.3), Retail Sales, Private Payroll figures (67,000) and Pending Home sales (5.2%) were better than expected. Unfortunately however this has largely been clouded by equity markets looking particularly shaky while at the same time having the austerity VS stimulus debate raging on in the US. The S&P500 is clearly desperate for good news and off the back of the better than expected manufacturing release, the S&P 500 rallied 2.95%. The stimulus debate continues and the Obama administration announced this week a further US50B in infrastructure projects. Given that last year’s stimulus was US 787B, that their unemployment remains uninspired at 9.5% and that our own infrastructure project was A20billion it raises the question of just where the stimulus will be applied next given that private demand is failing to fire.

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