The news of Osama Bin Laden’s death roiled markets overnight, but the short term reaction to this news may fade quickly as market focus shifts to important economic data and central bank meetings later this week. Canada goes to the polls today and the RBA is on tap tonight.
The dramatic news of the killing of Osama Bin Laden by US special forces in Pakistan send shockwaves through the market overnight – but those shockwaves are fading very quickly as we all have to wonder whether there are any important implications from this development for the financial markets in the here and now. Longer term, the implications may become more important, particularly for relations between the US and Pakistan after it became clear that Bin Laden was living in a large compound not particularly far from Pakistan’s capital rather than holed up in tribal areas along the Afghanistan/Pakistan border as was previously assumed. Could this trigger more tension between the US and Pakistan and what does it mean for the US exit strategy from Afghanistan? It is clear that Mr. Obama would like to effectively be out or nearly out of the Iraq and Afghanistan engagements well ahead of the election season next year. Will this accelerate or complicate the exit from the Afghanistan theater? These are the important medium to longer term questions - but for now, as long as there are no follow on incidents or evidence of reprisals from Bin Laden sympathizers, this news will likely quickly fade, particularly in a week so rich in event risks as this one is.
RBA preview
Tonight we have the RBA out with its latest interest rate decision. The overwhelming majority are expecting no change to the interest rate. Some recent headline inflation indicators have some observers looking for a shift in wording on inflation, which the RBA has kept fairly mild as it also suggested that the Aussie’s strength was helping to damp pressures. While headline inflation has pushed higher, the RBA’s Q1 “trimmed mean” measure of inflation released recently was only a tenth of a percent higher than the multi-year low seen in Q4 of last year, and the latest house price data shows house prices falling sharply in the first quarter. Meanwhile, consumers are getting pinched by rising commodity prices and the services and manufacturing sectors are practically in recession if we are to believe recent AiG surveys (note the release of the manufacturing survey out overnight that showed a sub-50 reading for the 7th time out of the last eight readings.) All in all, it’s hard to see the RBA wanting to aggravate the strength of the currency and it may use relatively mild language in its statement and avoid anything that would aggravate Aussie upside.
Australia’s economy is a curious creature, with the dominance of the mining sector and the strength of the currency clearly raising the risks that the Dutch Disease continues to damage the economy’s longer term prospects. If metals/coal prices merely stabilize for a time, much less drop, the country’s economy could quickly stagnate or even tip into a mild recession. And if there is any serious erosion of Chinese demand for commodities like iron ore and coal, then it is watch out below time for the Aussie. Ahead of tonight’s RBA, we note the strong divergence of AUDUSD strength with BHP Billiton’s weak stock price over the last two weeks. One of these developments is “wrong” as there is nothing in the current environment to suggest that this historical correlation won’t continue.
Greece debt rumors and denials
Rumors continue to swirl about the possibility that the Greeks are seeking a large haircut on their sovereign debt after 2-year yields spiked as high as 25% last week. Official Greek sources strongly deny stories that there is any official campaign aimed at restructuring. Meanwhile, the ECB’s Wellink said today that the ECB opposes restructuring (the ECB will always oppose this – European banks are extremely leveraged and any restructuring would require broad based recapitalization of banks – something that could only be achieved through money printing assuming funds in the system are insufficient. Yes, the system could possibly handle a restructuring of a given size, but once the “restructuring genie” is let out of the bottle, the contagion risk could explode, so the ECB doesn’t even want to go there. As long as the ECB is able to avoid the restructuring/recapitalization rout, the seeming soundness of the Euro is kept intact for a time. But how long can the ECB continue to play extend and pretend? Neither Ireland nor Greece is likely to ever repay their debt in full – but does that realization come in 3 months time or 3 years time?). Meanwhile, Wellink and Greek sources did suggest that an extension of the Greek debt repayment timeframe is on the table. Extend and pretend, indeed. Elsewhere, Spanish debt spreads remain relatively calm though wider than they were two weeks ago. The next key psychological resistance in the EURUSD runup is now at 1.50 and the next key event risks for the Euro are around mid-month as the EuroZone’s finance ministers are set to meet in Brussels on May 16 and May 17.
US ISM
The US ISM Manufacturing number was very strong, slightly beating expectations, but a tad lower than last month’s. The prices paid index remains sky-high and new orders and particularly order backlogs were strong. The employment sub-index remains at odds with the latest poor data from jobless claims as it was at a very robust 62.7. The non-manufacturing ISM carries far more weight as a test for the US economy’s strength and will be released Wednesday.
Looking ahead
Besides the RBA up tonight, other critical event risks this week include the Canadian elections today (some risk premium built into the CAD move of late as it has lagged other pro-risk trades), the ISM non-manufacturing data and ADP employment change data on Wednesday, ECB and BoE central bank meetings on Thursday, and US and Canadian employment reports on Friday.
We note with interest the fact that risk appetite in the equity market is down while the oil price has suddenly sprung to a new high for the cycle. This breaks the previous pattern and is in line with our protest from our Friday video update that commodity and stock prices can’t move upward together forever. Eventually, higher energy prices have to be considered a negative risk for the economy.
Be careful out there
Economic Data Highlights
- China Apr. PMI Manufacturing out at 52.9 vs. 53.9 expected and 53.4 in Mar.
- UK Apr. Hometrack Housing Survey out at 0.0% MoM and -3.3% YoY vs. -0.1%/-3.2% in Mar., respectively
- Australia Apr. AiG Performance of Manufacturing Index out at 48.4 vs. 47.9 in Mar.
- Australia Q1 House Price Index fell -1.7% QoQ and -0.2% YoY vs. -0.5%/+1.6% expected, respectively and vs. +5.0% YoY in Q4
- Japan Mar. Labor Cash Earnings fell -0.4% YoY vs. +0.3% in Feb.
- Sweden Apr. Swedbank PMI Survey out at 59.8 vs. 58.5 expected and58.6 in Mar.
- Norway Apr. PMI out at 55.6 vs. 57.1 expected and 57.4 in Mar.
- Switzerland Mar. Retail Sales out at -0.2% YoY vs. +1.8% in Feb.
- Switzerland Apr. SVME PMI out at 58.4 vs. 59.8 expected and 59.3in Mar.
- Canada Mar. Industrial Product Price out at +0.9% MoM vs. +0.7% expected
- Canada Mar. Raw Materials Price out at +5.7% MoM vs. +2.5% expected
- US Mar. Construction Spending out at +1.4% MoM vs. +0.4% expected and -2.4% in Feb.
- US Apr. ISM Manufacturing out at 60.4 vs. 59.5 expected and 61.2 in Mar.
Upcoming Economic Calendar Highlights (all times GMT)
- New Zealand Q1 Average Hourly Earnings (2245)
- China Apr. Non-manufacturing PMI (0100)
- Australia RBA Cash Target (0430)