Tuesday, July 26, 2011

US debt ceiling debacle: Will They or Won’t They?

Today all the focus is on the US debt ceiling debacle. While overall risk sentiment is holding up well enough, with Asian equities and European equity futures in positive territory, the USD has come under significant pressure and has been by far the worst-performing currency overnight. Markets seem to be expressing all of their fear through the currency, and still don’t know what to do about Treasuries with the US 10-year yield bobbing around the 3.00% level for the last few days. President Obama’s speech last night didn’t do much to clarify the outlook, and markets will be headline-watching again today for developments in the US.

AUD: In a last minute switch, the much anticipated RBA Governor speech to business economists today analysed "The Cautious Consumer", a phrase the Bank has referred to for quite some time now. The overall tone was ‘measured’ and didn't show a great deal of concern about below-trend consumer spending and the sharp rise in the savings rate, and saw scope for more optimism in the medium-term. It certainly didn't feel like the Bank supported more recent calls for lower cash rates to re-stimulate private consumption, but a near-term cash rate hike isn't on the agenda either. Overall, ahead of Q2 CPI tomorrow, we are still looking for +25 bps to 5.00% in November, and see the speech as slightly bond negative and AUD positive. Those calling for an August hike will need to see at least another +0.85%/qtr surge in the RBA underlying inflation measures tomorrow to confirm those expectations.

GBP: The picture for Q2 GDP is not optimistic. Though data showed that consumption did finally pick up, it is still not driving significant growth, and slowing IP and trade are not helping as much as they used to either. Hard data tracking points us at 0.2% q/q consensus and in line with NIESR GDP estimate from earlier this month. Despite the unpredictable contribution from Olympic ticket sales, the risks from here are skewed to the downside, as signalled by a large gap in government financing at -£35bn in Q2, coming from a shortfall in revenues rather than overspending.

INR: The RBI raised the repo rate by 50 bps to 8.0%, a bigger increase than the 25 bps that was almost unanimously expected. The bank took an aggressive stance against higher inflation, raising its forecast from 6.00% to 7.00%, and said that it sees no signs for a broad-based economic slowdown.

Published: 26 July, 2011
written by: Bill Hubard , Chief Economist at Markets.com