Wednesday Thought bubbles, on the RBA, Greece and Markets

A collection of thoughts this morning after a night where markets were hopeful of a positive outcome for Greece and a day after the RBA’s minutes told us that they are taking heed of the warnings ourselves and others have given on the domestic economy.

Greece

If you ever truly wondered if markets were rational then last night was a classic example, or proof, that they are not. Equities rallied across the board in anticipation of the vote of confidence, or no if he lost, in the Greek Prime Minister Papendreou and his Government. Why you would place a bet on such a tenuous outcome that only insiders really had a feel for I’ll never know. But I guess that the bet is that now Greece will, must, agree to further austerity in order to get the money from the EU and IMF.

Writing in the FT, Martin Wolf summed the situation up really well when he said,

The question about the prospects for Greece is not whether the country will default. That is, in my view, as near to a certainty as any such thing can be. The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it. The country seems too uncompetitive for that. A default is a necessary, but not a sufficient, condition for a return to economic health.

So this morning’s vote was a step on the road to the receipt of the current promised funds to Greece and if Greece doesn’t default markets are certainly set up for a bounce. I hope we get it because it will be a great opportunity to trade the bounce and then either sell or take further cover on held positions in risk assets. Trader types can take a more aggressive  approach but the situation remains fluid and the price action tells us the short-term guys are in control

Reality Bites at Martin Place.

The RBA minutes were released yesterday morning and by now you have probably heard and read plenty about the fact that the RBA has signalled they still see a need to raise rates at some point. But for us the key point is that the concerns we have been airing for some time now received the level of airplay we think prudent and that the RBA is firmly on hold.

These minutes are very dovish and reveal that there is “no urgency” to tighten as the RBA concedes that “activity is quite subdued” in some parts of the economy. From our point of view these minutes imply the hurdle for an RBA rate hike is much bigger than many believed and that the RBA is NOW taking more notice of non-mining weakness or at least quiescence. The key point is that they retain their tightening bias but for now the data is not requiring them to need to hike.

On the international scene here is a snapshot of what they had to say,

The expansion in the world economy was continuing, although some of the recent data were a little softer, especially in the case of the United States. Sovereign debt problems in Europe had also come to the fore again. However, growth in much of east Asia had remained strong. Inflationary pressures continued to be a concern in a number of regions, particularly in much of Asia.

Information on the Chinese economy had been mixed…

Japanese GDP contracted in the March quarter by nearly 1 per cent and there had been sharp falls in most of the economic indicators for the month of March…

March quarter GDP growth remained strong in India and concern over inflation had prompted the central bank to raise its policy rate again…

The recovery in the US economy had lost some momentum. Consumption growth had slowed…

Output in the euro area grew strongly in the March quarter, partly due to a recovery from the harsh weather in December. The north-south divide in economic performance in the euro area had continued…

So on balance we’d interpret that as saying even though the recovery is still underway globally the momentum is slowing.

Domestically we see a bifurcation in the economic outlook.

On investment –

The past month had brought further evidence of the expected strength in mining investment

Investment intentions outside the mining sector were considerably weaker, with the capital expenditure survey suggesting a significant downward revision to planned spending on buildings and structures in 2011/12. Non-residential building construction had fallen in the March quarter and there was little evidence of a pick-up in the near term, despite the gradual tightening in office vacancy rates. Residential building approvals were also at fairly low levels, notwithstanding a bounce in apartment approvals in the latest monthly data.

On Households and Consumption –

Households had continued to be cautious in their spending and borrowing behaviour…

Retail sales data and liaison suggested continued moderate growth in spending in the first two months of the June quarter. Motor vehicle sales had fallen significantly in May, largely reflecting the problems in the global supply chain emanating from Japan. Notwithstanding above-average sentiment about the general outlook for the economy, surveys continued to suggest that households’ perceptions of their own personal finances over the coming year were well below average.

Consistent with ongoing consumer caution, the housing market had remained soft

THIS IS A SERIES OF SIGNIFICANT ADMISSIONS ON THE WEAKNESS IN THE NON-MINING SECTOR AND I THINK AND ACKNOWLEDGEMENT THAT THE RBA DOESN’T UNDERSTAND WHY HOUSEHOLDS ARE SO CAUTIOUS

Certainly the point made in the minutes about the level of restraint on economic activity coming from the Government’s fiscal stance stood out strongly as well. So all in all the minutes spoke of restraint – on the part of the RBA as they wait to see how the data evolves.

Of interest was this comment in the second last paragraph where they say, “If the economy evolved in line with the staff forecasts, GDP growth would be somewhat above trend over the next few years, led by growth in the resources sector. A gradual pick-up in inflation could be expected under this scenario.” Staff forecasts? Perhaps there is a split between the Board and the Staffers as we suggested after Governor Stevens recent speech after all.

As we noted yesterday the RBA “This outlook suggested that further tightening in monetary policy would be necessary at some point. Members considered, however, that the flow of data over the past month had not added any urgency to the need for an adjustment to policy. While there had been additional evidence of the coming strong pick-up in investment in the resources sector, activity remained quite subdued in some other important parts of the economy, partly reflecting the Board’s earlier actions as well as the appreciation of the exchange rate.”

The globe is also softer so they are onon to  hold for a while it seems.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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