httpvh://www.youtube.com/watch?v=OjCDoFoD0Yg
Aussie post gains while matadors tame bulls.
• Global risk off, US equities look vulnerable
• Disinflation, Stagflation, Inflation; where is America?
• Data in the UK weaker, ECB raises rates.
The local unit has remained strong despite markets incurring systematic risk courtesy of Japan and some poor earnings figures highlighting stock market sensitivity. We’ve had an intermittent bull market in play since December, after recovering from the initial Japanese quake/tsunami. This week has seen risk-off due to an IMF downgrade of US growth prospects, further earthquakes in Japan and an upgrade of the Fukishima reactor disaster on par with Chernobyl. Despite these impediments to global risk appetite the Aussie found fresh highs of 1.0581 on Friday night as markets assess the comparative fundamentals with the US and heavily favour those of Australia. Assisting this was Thursday’s better than expected Employment Change (37.8K) figure. US equities (S&P500 -1.39%) also look mildly vulnerable as early US company earnings have been wide of the mark and lower commodity prices have undermined energy stocks.
Comparative fundamentals with the States will always be a hot topic, but never have they been so contentious. Worst case scenarios include Disinflation, similar to what Japan incurred in 1990’s (whereby inflation increased at decreasing amounts) or even Stagflation whereby inflation rises however not with comparative growth in GDP and employment. Although we have seen consistent falls in the number of people filing for benefits in the US, the falls in these claims figures have often been modest highlighting a possible12 month turnaround to pre-GFC levels. Furthermore, gains to employment figures have been positive since November 2010, however after considering the significant change to employment since February 2008, we would need more than 280 thousand jobs added consistently for 18months to get back to pre 2008 levels of participation. This puts great emphasis on the near-term avoidance of Japan’s 1990’s experience and highlights the risk of premature interest rate hikes. The IMF’s US downgrade this week is another signal that comparative fundamentals are firmly in favour of Australia.
Economic data out of the UK this week has culled expectations of a near-term rate hike while Jean-Claude Trichet raises interest rates to 1.25%. In the UK Industrial Production (-1.2%) and Manufacturing Production (0%) were significantly down on expectations while CPI (4%) was also lower, paring expectations of a rate hike by the BoE. On the flip side, Jean-Claude Trichet and the ECB hiked interest rates to 1.25% citing the inflationary pressures of the more robust member nations. The GBP is looking unappealing yet again while the Euro has put on a lot of weight against the GBP and a modest amount against the AUD.
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