- Australian cash rate steady at 4.75%
- Beware the ratings agencies
The Independent reports that, following a crash between two high-speed trains, the Chinese Communist Party “ordered newspapers to avoid all mention of the crash… except for ‘positive news or information released by the authorities’”. Not surprisingly, Chinese journalists have found it extremely difficult to put a positive spin on a train wreck.
American journalists are having a similar problem with the US debt bill, which was passed by the House of Representatives yesterday and goes to the Senate today. Those on the left say the president has “capitulated” and right-wingers believe the spending cuts were not enough. A particularly colourful criticism came from Representative Emanuel Cleaver, a Missouri Democrat, who said: “This deal is a sugar-coated Satan sandwich. If you lift the bun, you will not like what you see.”
Investors’ first inclination was not to bother looking under the bun. A deal had been done and disaster was averted. There might be a credit downgrade to come but there would be no default. During the morning and early afternoon the dollar moved ahead. Sterling was under pressure after Britain’s manufacturing purchasing managers’ index fell two points to 49.1, below the line that separates expansion from contraction. Euroland’s reading was not much better at 50.4 but at least it signified growth. Germany scored a 52.0, France was at 50.5 and even Italy scraped into the growth zone at 50.1.
After lunch the market was taken aback when the US manufacturing PMI came in at 50.9, having been expected to be at least four points higher. The news prompted investors to have a closer look at their Satan sandwich and they lifted the bun. It revealed a plan to cut spending by $2.4 trillion, slightly more than the Federal Reserve has pumped into the economy through its quantitative easing programmes. US gross domestic product is growing by less than 1% a year. The creation of new jobs is failing to keep pace with population growth, let alone replace those lost during the recession. Yet the House has approved a bill that can only dampen activity.
The reaction of the US dollar to all of this was not coherent. Initially it strengthened, at least in part because of relief that a budget deal had been done. It continued its upward move even after the low point of the American PMI and ran out of steam only as London was closing for the day. Since then the dollar has fallen back to levels similar to those that obtained before the announcement of weak GDP figures on Friday. On the day, sterling and the euro are down by more than a cent. The yen is almost unchanged against the dollar having touched a record high in mid-afternoon. There was no evidence of central bank intervention taking place to hold back the yen but there has been much talk of the possibility. The Canadian dollar took another kicking from a bad US ecostat, falling by a cent against the Greenback when the weaker PMI was announced.
Apart from the budget bill, the PMI-fest and a Euroland unemployment rate unchanged at 9.9%, there was little to see yesterday . Figures released overnight showed Australian house prices -1.9% lower in the year to June with more than half that loss coming in the second quarter. Building permits, predicted to have risen by 3.2%, actually fell by -3.5%.
The Reserve Bank of Australia held its cash rate unchanged at 4.75%, as forecast by most analysts. In its statement the RBA “judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks”. It went on to say that “in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.” Apparently investors had been expecting a more positive comment; they sold the Australian dollar after the announcement, taking it nearly a cent lower against the pound.
There are no really big-ticket items on today’s agenda. Switzerland offers retail sales and the SVME PMI, neither of which is likely to detract from the franc’s safe-haven popularity. The Euroland producer price index counts for little after last week’s fall in CPI inflation. Britain’s construction sector PMI rarely attracts attention and should not do so today unless it is wildly adrift from the expected 53.0. US personal income and spending figures will probably reinforce the appearance of weakness shown in last Friday’s GDP numbers.
Lurking in the background are the credit rating agencies, all of whom are reassessing their opinion of the United States and its AAA rating. The mutterings on the street suggest that they will make no move on a downgrade unless the spending cuts in the current bill fail to take effect. It will be months before that becomes clear. However, all it takes is for just one agency to break ranks and hit Washington with an AA+ and things will start to get messy.
Finally, take a look at the following numbers. Greece’s government is paying 21.6% for five-year-loans, Portugal is paying 14.6%, Spain is paying 5.38%, Italy is paying 5.04%, Germany is paying 1.71%, the United States is paying 1.38% and Britain is paying… 1.23%. The United Kingdom, with its AAA credit rating and its lack of involvement in any current debt crisis, can borrow more cheaply than most of its peer group. There … feeling better now?
