Westpac Market Outlook June, 2012
Friday, June 08, 2012
Each significant historical phase, fair or foul, develops its own jargon. The European debt crisis has introduced us to the “PIIGS”; the “LTRO”; the “EFSF”; the “ESM”; “Merkozy”; “Target2”; the “Troika” and the “Grexit”. The degree to which such jargon enters into perpetual usage presumably depends upon the duration of the era that spawned them and its collective impact on the psyche of those that lived through it. It can only be hoped that the aforementioned neologisms do not permanently infiltrate the lexicon. Allow them to date those of us working at the financial coalface c.2012, OK, that is probably a given by now. Have your yet to be born grandchildren tell you that they learnt about the “Grexit” in school today? We sincerely hope that it doesn’t come to that.
The Reserve Bank Board lowered the cash rate by 25bps to 3.5% after their meeting on June 5. Given concerns around the world economy and the domestic picture, we feel that the Bank is prepared to cut rates significantly further, notwithstanding the 5¼% annualised growth rate reported in the March quarter national accounts.
Local markets have been swept up in the global downdraft over the last month, not helped by the fact that recent data has muddied the waters as to where the domestic economy stands. Current market pricing fairly reflects the tail risk that Europe could push the RBNZ to ease, but our view remains that an extended period of on-hold rates is the most likely outcome. In addition to our regular coverage, we review the Budget on page 10.
: The past month has certainly not been kind. Consistently weaker data, highlighted by a poor May employment report, alongside ongoing stress in Europe and thus a stronger dollar, is not what the authorities were hoping for. We remain confident that additional monetary easing will be forthcoming from the Fed, perhaps as early as the meeting of 31 July.
The economy has been decelerating for at least a year under the combined weight of monetary austerity, draconian housing controls, weakening export demand and a passive tightening of fiscal policy. The authorities have now acknowledged this and are setting the wheels in motion for an acceleration in infrastructure projects alongside monetary easing (now including a rate cut) and consumption incentives. These measures should gain traction before year end.
The political deadline that most are currently focussing on is the Greek election of June 17. There is another political deadline – June 21 – that is consequential for markets. If that date passes without a consumption tax bill moving through the Diet, PM Noda will probably resign and the last real hope for fiscal consolidation will have used eight of its nine lives.
March quarter GDP, which closes the books on the fiscal year, rose just 5.3%yr (6.5% for the full fiscal year) from 6.1% prior. Non-farm growth slowed to 5.9%yr, below the GFC trough. This outcome will spark a rash of forecast downgrades in the private sector – which could have negative implications for their global GDP expectations.
March quarter national accounts data shows that the external shock has not distributed evenly across the region, The latest business surveys imply below par manufacturing activity in the short term at least, although the inventory cycle is not exactly synchronised across the region. The June quarter looks like it will be a significant challenge.
: As we go to press there has been a surge of market optimism that central bank and fiscal policy makers in the stronger northern European economies might be closer to a more powerful and possibly joint response to the sovereign and banking debt crisis. That confidence seems misplaced. For every ray of rhetorical Latin hope, there is a dose of Teutonic realism to counter it. We see an eventual move towards unadulterated monetary expansion by the ECB: but they will deny until the day they do it. < Back to Latest News