Westpac Market Outlook, April, 2012
Wednesday, April 04, 2012
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The month of February concluded with a general tone of optimism in the air and the crisp scent of one trillion euros worth of ECB liquidity support filling the nostrils of the investor community. Alongside some firmer data, that ‘rising tide’ was sufficient to lift all boats. March, on the other hand, has seen a fragmentation between China-leveraged asset classes (down) the US equity market (up) and European markets (flat). While some differentiation is welcome after the binary R+R– trading that has dominated the post GFC world, this latest constellation of moves is something a headscratcher. Our basic view remains that the data flow in coming months will not support the current pricing levels of growth oriented assets; conventional monetary policy is likely to be eased in those jurisdications that have room to do so (with some notable exceptions like New Zealand); unconventional policies will be expanded further where the zero bound (or the logistical equivalent) has been reached; while financial tensions will again become de rigueur in Europe, given the brittle state of both public and private sector balance sheets.
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 4.25% at their April meeting. The accompanying statement flagged the distinct possibility of a cut at the May meeting if inflation behaves itself on April 24. Such a move would be entirely consistent with our view. A bout of China-inspired jitters hurt the Australian dollar over the month.
GDP grew slightly less than expected in the December quarter, and with yet more downward revisions to the recent history, calendar year growth reached just 1.4%, compared to 1.2% in 2010. Even so, business indicators have started 2012 on a stronger note, while consumers have remained circumspect about their own prospects.
The activity momentum seen at the end of 2011 has not persisted into 2012. Although the data is seemingly not (yet) weak enough to justify further policy easing, we believe that the Fed will be laying the groundwork for additional growth supporting measures around the middle of the year.
Since we went to press in March, the flow of data has been consistent with both our below consensus view on the short term activity front and our assessment that the counter-cyclical policy thrust remains timid in nature. When one brings survey responses on the policy stance/willingness to lend/desire to borrow together, one can interpret the lending data, which has disappointed us in the year to date, as the joint outcome of constrained credit supply and softer loan demand.
The recent softness in the yen can be partially attributed to the combination of heavy intervention (and the threat of the same) and the BoJ’s unconventional policies, the February 14 announcement of which was a surprise to the markets. We hope that the Bank will be emboldened by the events of recent months and ‘maintain the rage’.
As ever, March was all about the Union Budget. The fiscal deficit outcome for 11/12 is expected to come in at 5.9% of GDP, a deterioration from 10/11. The forward estimates anticipate a modest improvement to 5.1% of GDP in 12/13, the first of three years of consolidation. The projections look plausible, with the exception of the aspirational reduction in the subsidy bill.
While the worst case scenario for global growth in early 2012 has not eventuated, there is not yet clear visibility on where demand is headed beyond the early part of Q2. The softly, softly approach being pursued by the region’s central banks is quite understandable against this backdrop, even if we would prefer greater preemption where there is room to lower rates.
Spring has arrived after a bleak winter. The literal and figurative moment of sunshine the region is enjoying post LTRO has been sullied in recent weeks by the reminder that the financial storm clouds may be regathering just over the horizon. The news flow out of Spain, Portugal, Greece, Italy and Ireland has been chipping away at the complacency of early March. < Back to Latest News