News

The minutes of the June RBA board meeting were released last week and showed that the RBA continues to be worried about Sydney house prices, a strong $A and a labour market that is picking up too slowly. While there was no explicit easing bias, governor Glenn Stevens made it clear that the bank was prepared to cut rates further if conditions warranted. The dilemma for the governor is that lowering cash rates no longer has the stimulus impact it had when rates were higher and the last time the RBA cut rates, the $A actually rallied. Westpac economics believes the RBA will stay on hold for the rest of 2015 and 2016 with the RBA adopting a more explicit easing bias in the months ahead.

RBS released a useful table on the timeline of events in the GREXIT saga. For those that are interested in following it more closely here are the key meeting, payment and deadline dates.

Money continues to flow out of Greek banks as the standoff between the Greek Government and the ECB/IMF continues. US$1.2b is reported to have been withdrawn on Friday which represents a sharp increase in the amounts taken out of Greek banks in recent months. The ECB is providing emergency funding via the Bank of Greece to keep the banking system afloat while negotiations between the Greek government and the ECB/IMF continue. The Greek prime minister said his government would strike a deal with European Union and IMF creditors and “those who are betting on crisis and terror scenarios will be proven wrong”. His government delivered new proposals to European leader over the weekend in an attempt to reach a deal before the 30 June deadline when a €1.55b repayment to the IMF is due.

The June FOMC statement was more positive in its assessment of activity than April’s, noting that the economy is expanding at a moderate pace and that “Since the committee last met in April, the pace of job gains has picked up and labour-market gains have improved further.” It seems clear that the US Federal Reserve remains on track to raise rates later this year, however, 2015 growth forecasts were revised down and unemployment rate forecasts were revised up. The average interest rate projections were actually lowered – despite the median being unchanged in 2015. Fed chair Yellen used the press briefing to emphasise that policy will remain highly accommodative even after the normalisation process begins and added that the importance of the first move should not be overstated.

For the past year markets have been discounting the likelihood of inflation rearing its head. Historically inflation has been the villain but not so recently. QIC thinks inflation will re-emerge as the institution has the view central banks will ultimately be successful in re-stoking inflationary pressures. Ken Wilkes, QIC’s director of global fixed interest said, “Late last year, the market really became fixated on deflation and probably rightly so….The market was pricing in really big disinflation risks”. The inflation-linked premium has moved to being negative and it “would imply that you are being paid to buy inflation protection right now.” But “Ultimately, we think that central banks are credible…” and “have a very strong desire to deliver on their inflation objectives”.

The Sydney Futures Exchange 3y and 10y June futures contracts expired last week. The new September contract is now the front month active contract.

Moody’s last week affirmed the airline’s Ba1 corporate family rating and Ba2 senior unsecured rating as it raised the outlook to positive from stable. The change partly reflected the airline’s progress on its transformation program, the decline in its capacity war with rival Virgin that has pushed down prices, a lower Australian dollar and lower fuel prices, ratings agency Moody’s said.

Data released by the U.S. Treasury Department last week showed Chinese holdings of US Treasury bonds increased for second month in a row.  China held $US1.263 trillion in US Treasuries, up from $US1.261 trillion in March. Its holdings peaked at $US1.317 trillion in November 2013. China has been the largest holder of US treasury’s for several years now, overtaking Japan which was the largest holder for a lengthy period of time. Eurozone countries have in recent months reduced holdings after reaching a peak in 2014. Japan had the second-largest holdings of US Treasury’s, with $US1.215 trillion in April, down from $US1.226 trillion in March.
Overall, foreigners bought long-term US securities for a third straight month in April.

Moody’s has downgraded supermarket giant Woolworths outlook to negative from stable. The ratings agency lowered the outlook based on Woolworths’ dwindling sales across its food and liquor business with sales expected to be volatile over the next 12 to 18 months as shelf prices come under increasing downward pressure. Moody’s also said Woolworths’ credit profile has continued to deteriorate over the past year due to the under performance of its food and liquor, general merchandise and home improvement departments. Last week Woolworths CEO Grant O’Brien announced his retirement and the company announced it would cut 1,200 jobs nationally and issued a profit warning.

Job growth in the US lifted markedly in May indicating strong momentum in the economy. Nonfarm payrolls rose 280,000 last month, the biggest gain since December 2014, according to the Labor Department said.