Thursday, February 23, 2012

Opening Statement to House of Representatives Standing Committee on Economics

Glenn Stevens

Sydney - 24 February 2012

When we last met with the Committee in August, we had entered a period of heightened uncertainty about the global economy and financial system. The investment community was focusing increasingly on the high levels of public debt in major countries, and especially on the situation in the euro area, where budgetary pressures, banking pressures and competitiveness issues within the single currency area make for a very difficult set of problems. There was considerable instability in markets. But our view at that time – tentatively – was that we were not witnessing a repeat of the events of late 2008.

Admittedly, the second half of 2011 saw some very anxious moments. There was a flight from risk that pushed up borrowing costs for major countries like Spain and Italy, but pushed them down for countries like Germany and the United States to the lowest levels for more than 50 years in spite of the fiscal challenges the US itself faces. Funding markets for European banks in particular effectively closed for a few months, and for other banks became much more difficult and certainly more expensive.

The palpable fear before Christmas that Europe was on the brink of some sort of very bad financial event has lessened over our summer. The anxiety has not gone entirely away, and nor will it for some time. But the worst has not happened. Financial markets, while hardly brimming with confidence, have recovered somewhat over the past couple of months. Banks are able to access term funding markets again, albeit at higher cost. High-frequency gauges of business conditions and confidence have stabilised over the past couple of months in Asia and North America, and even in Europe. We have not seen the very steep fall that we saw in all these indicators in late 2008.

The actions of the European Central Bank contributed greatly to the stabilisation of financing conditions, essentially by removing, for a time, questions over the funding of European banks. The efforts of European leaders to craft a stronger framework for euro-wide governance on the fiscal side have also continued. A great deal more needs to be done to place European banks and sovereigns onto a stable footing, and to boost potential growth in Europe. But progress is being made.

Forecasts for the global economy in 2012 have been marked lower, mainly due to the effects of the problems in the euro area. Revisions to the IMF's forecasts in particular have been given great prominence. Our own forecasts have come down too, though they had already been a bit weaker than the IMF's. On these forecasts, global GDP will grow by about 3¼ per cent in 2012. That is down from about 3¾ per cent in 2011, which was about the average rate of growth over the past 15 years. On its face, this performance, should it occur, would be no disaster. After all, growth is going to be below average some of the time.

If we look for things to worry about, we will certainly find them. The global outlook has a very uneven composition: some countries, particularly in Europe, will record very weak outcomes. Moreover it is unlikely that a moment will come any time soon when we will be able to say the problems in Europe are behind us. Progress will be slow and there will be periodic setbacks and bouts of heightened anxiety – that is the nature of these things.

But equally, we should recognise that things have not been uniformly bad recently. The US economy has not experienced the ‘double dip’ some had feared six months ago, but instead has continued growing. The US corporate sector is in very strong shape, is cashed up and will at some point be able to start moving ahead more quickly. It appears American corporations have stepped up the pace of hiring in the past few months.

In China, the slowing in growth we have seen seems to have been roughly what the policymakers were looking for, and they appear to be getting on top of their inflation and housing boom problems. Around the rest of Asia, activity has also slowed, in part reflecting trade links with Europe. But it has not slumped and as inflation comes down, policymakers have increased room to respond. The pressure on European banks to shed assets has led to some tightening of trade credit in the Asian region, but at this stage the system seems to be adjusting to that without major drama. We have not, to date, seen the collapse of trade credit and trade flows we saw in late 2008.

Commodity prices, which had declined noticeably from their peaks in the first half of 2011, have actually moved sideways, or in some cases picked up a bit, for a few months now. They remain high by historical standards. That seems roughly consistent with the group of countries that makes up Australia's main trading partners expanding at a reasonable pace – expected by the IMF to be over 4 per cent this year, not very different from last year. Again, we do not, at this point, see the signs of the rapid collapse in global demand we saw three years ago.

At home, most of the information coming in suggests the economy has grown at close to an average pace over the past year. This outcome was weaker than we had expected a year ago. It was partly due to the effects of flooding on resource production but also due to softer outcomes in the non-resource side of the economy. CPI inflation has come down, as expected, as the impact of last summer's floods on food prices reverse. In underlying terms, inflation was about 2½ per cent over 2011, also a slightly lower outcome than we had, at one point, thought might occur. The labour market was generally softer in 2011 after a year of unusual strength in 2010 (though the unemployment rate at its latest reading was virtually unchanged from a year earlier).

These changes to the macroeconomic picture, against a backdrop of a period of intensified international turmoil, saw the Board lower the cash rate by 50 basis points in the closing months of 2011. Perhaps surprisingly in the face of developments in wholesale funding costs, this was initially fully reflected in a reduction in most lending rates, though there has been a partial reversal of that recently. We have repeatedly made clear that the shifting relationship between the cash rate and other rates in the economy is a factor the Board takes into consideration in setting the cash rate. That will remain the case. Recent developments do not materially affect the capacity of monetary policy to achieve its goals.

Looking ahead, the Bank's central expectation is for growth to be close to trend, and inflation close to the target, over the coming one to two years. There are, naturally, risks surrounding this central view. Those are spelled out in the latest Statement on Monetary Policy.

Perhaps what is most noteworthy about the Australian economy is the way in which the drivers of growth have changed in recent times. The Bank has spoken at length before about the terms of trade, and the resulting resource investment boom, which is still building and which will take the share of business investment in GDP to its highest level for 50 years. We have spoken also about how, on the other side, household behaviour has
changed – people are saving more and borrowing less. Spending is growing in line with income, but people are spending their money differently. The retail sector is finding it has to adapt to this changed environment. Some other industries are struggling with the high exchange rate. Meanwhile certain service sectors are growing quite smartly. Hence, while the economy overall has recorded ‘average’ growth, few sectors are in fact experiencing ‘average’ performance themselves – some are clearly quite weak relative to average, while some others are much stronger.

The Bank is quite aware of these differences and the pressures they bring to businesses and individuals. But we also know that monetary policy cannot remove the forces generating different paces of growth in our economy. We have to keep our eye on the overall performance of demand and prices. We are acutely conscious that history may offer limited guidance in assessing the net impact of the disparate and very powerful forces that are at work. Nonetheless, that is the assessment we must try to make.

Our most recent assessment was that, with growth near trend, inflation consistent with the target, interest rates about average and an outlook suggesting more of the same, the setting of policy was about right for the moment. Of course, we continue to reassess things each month.

My colleagues and I are here to respond to your questions.

Euro jumps vs dollar and yen, but may top soon

By Gertrude Chavez-Dreyfuss
NEW YORK | Thu Feb 23, 2012 4:45pm EST

(Reuters) - The euro jumped to a 2-1/2-month high against the dollar and a multi-month high versus the yen on Thursday as solid data on Germany, Europe's biggest economy, offset a bleak economic forecast from the European Commission.

The euro traded above its 100-day moving average on Thursday for the first time since late October after the Ifo think-tank reported that business sentiment in Germany rose for a fourth straight month in February, boosting optimism on the country's economy.

The euro, however, retreated from the highs after the European Commission said the euro zone economy was heading into its second recession in just three years.

The commission, the executive arm of the European Union, said growth in the wider EU will stagnate, warning that the 17-nation single currency area has yet to break its vicious cycle of debt.

"The move higher in the euro today is valid and reasonable, partly triggered by the German Ifo data and partly due to the Greek bailout agreement early this week," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York. "That deal essentially removed a tail risk for the euro zone.

"But how long can the euro's gains last?" he added. "My sense is that it will top out between $1.34-$1.35 because the European Central Bank is still expanding its balance sheet, which is good for risk appetite but not for the euro."

In late afternoon New York trading, the euro was up 0.9 percent at $1.33654. It soared to a session high of $1.33747, which was its strongest level since December 12 on trading platform EBS, as it took out stops above $1.3350.

The data on German business sentiment from the Munich-based Ifo think-tank was the key trigger for the euro, raising hopes that the German economy is improving and will avoid recession despite the problems facing indebted euro zone countries.

The euro broke above a key 100-day moving average around $1.33093 for the first time in 3-1/2 months.

The next target would be $1.3435, the 50 percent retracement of the decline from the late October peak to the mid-January trough.

One-month implied volatility on euro/dollar dropped to 9.76 percent on Thursday, the lowest since April 22, seemingly suggesting diminishing anxiety about the euro zone debt crisis.

Mark McCormick, currency strategist at Brown Brothers Harriman in New York, said next week's long-term refinancing operation by the ECB should further support the euro.

The European Central Bank next week is expected to lend nearly 500 billion euros to banks, although some forecasts go as high as 1 trillion euros.

A potential fly in the ointment could be Greece once again. Athens may vote on a private sector involvement bill that includes a provision to retroactively write down some of its debt on bond holders not participating in the debt swap.

McCormick said uncertainty stemming from the implementation of the private sector involvement and Greek elections should temper euro gains coming from the ECB's financing operation, keeping the euro confined to its recent trading range.

Andrew Wilkinson, chief economist at Miller & Tabak Co in New York, said the euro is destined for "bearish euphoria that is bound to feel the pull of gravity," although he said the currency "still appears to have $1.3500 engraved on its front."

Against the yen, the single currency rose to 106.999 yen, its strongest level since November 9 on trading platform EBS. The yen remained under pressure after recent monetary easing. The euro was last at 106.910 yen, up 0.4 percent on the day.

The dollar fell 0.4 percent against the yen to 79.950, off a seven-month high of 80.406 yen hit on Wednesday.

Analysts said there are no signs of hitting a peak in dollar/yen just yet, and a further rally is expected. The next target would be around 81.63 yen, which is the 61.8 percent retracement of the decline from the April 2011 peak of 85.530 to the record low hit on October 31.

The dollar, meanwhile, fell to a 3-1/2-month low versus the Swiss franc of 0.90120 franc. Traders said stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 franc.

The euro also fell against the franc to 1.20460 francs after breaking through a reported options barrier at 1.2050 francs. The pair edged nearer to the 1.20 franc floor the Swiss National Bank has pledged to defend.

Tuesday, February 7, 2012

U.S. Consumer Credit Climbed by $19.3B in Dec.

By Meera Louis - Feb 8, 2012 4:26 AM GMT+0800

Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.

Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.

Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”

An improving job market may be giving households the courage to take on more debt in order to sustain spending, which accounts for about 70 percent of the economy. At the same time, increasing dependence on credit may be an indication the gains in employment have yet to push wages high enough to single- handedly give consumers the means to keep shopping.

The median forecast was based on a survey of 37 economists. Estimates ranged from a decrease of $8 billion to an increase of $15 billion.

The back-to-back increase at the end of 2011 was the biggest since October-November 2001.
Auto, School Lending

Non-revolving debt, including educational and auto loans increased by $16.6 billion in December, the biggest gain since November 2001, today’s report showed. The Fed’s report doesn’t track debt secured by real estate, such as home equity lines of credit.

Industrywide sales of cars and light trucks totaled 12.8 million for all of 2011, a 10 percent increase from 2010, according to researcher Autodata Corp.

Demand for credit may keep growing as demand keeps improving. Auto sales climbed to a 14.1 million annual rate last month, according to industry data. Excluding a surge in August 2009 that reflected the government’s “cash-for-clunkers” program, it was the strongest month since May 2008.

General Motors Co. (GM) and Ford Motor Co. (F), the largest automakers by U.S. sales, forecast industrywide deliveries will rise to as much as 14 million in 2012, including medium- and heavy-duty trucks.

Revolving debt, which includes credit cards, climbed by $2.76 billion, according to the Fed’s statistics.
Credit Cards

MasterCard Inc., the world’s second-biggest payments network, last week said fourth-quarter profit climbed 24 percent as spending with credit and debit cards increased. Debit-card purchases increased 18 percent from the same time a year earlier, while those on credit cards rose 6.6 percent. Shares of the Purchase, New York-based company surged 66 percent in 2011, the fourth-best performer in the Standard & Poor’s 500 Index.

Employers added 243,000 workers to payrolls in January, exceeding all forecasts of economist surveyed by Bloomberg, and the jobless rate unexpectedly dropped to a three-year low of 8.3 percent, figures from the Labor Department showed last week.

A report from the Labor Department today showed there were almost four unemployed Americans vying for each job vacancy in December, more than twice the number before the recession began in December 2007. That may explain why wages have yet to pick up, prompting households to borrow.

Hourly earnings were up 1.9 percent in January from the same month in 2011 on average, the smallest year-over-year gain since April, the Labor Department reported last week. For production workers, the 1.5 percent increase was the smallest in records going back to 1965.

Greece, Troika Work on Final Rescue Draft

By Maria Petrakis, Natalie Weeks and Marcus Bensasson - Feb 8, 2012 4:59 AM GMT+0800

Greek Prime Minister Lucas Papademos postponed a meeting with heads of the political parties supporting his caretaker government a second time in as many days as the government and international creditors haggled over terms to secure a second aid package.

Papademos will meet with the leaders in Athens tomorrow, instead of tonight as previously scheduled, a spokeswoman for his office said. Instead, he will meet tonight with the so- called troika, comprising the European Commission, the European Central Bank and the International Monetary Fund, to put the final touches to terms required for a 130 billion-euro ($172 billion) rescue package, the spokeswoman said.

The delay is yet another hitch in completing a package that’s been on the table since July as the government struggles to wind up financing to avert a collapse of the economy, risking a new round of contagion in the euro area. With the country facing a 14.5 billion-euro bond payment on March 20, German Chancellor Angela Merkel warned yesterday that “time is running out” to reach an accord.

A Greek official said earlier the government and international creditors were close to a final draft of an agreement on budget and structural measures needed to extend the financial lifeline.
Further Cuts

While the prime minister and party chiefs have agreed to make further cuts this year equal to 1.5 percent of gross domestic product, they have yet to close gaps over measures demanded by creditors for the rescue. Unions, which struck today, have derided the conditions as “blackmail.”

“It is clear we are going into another drama for Greece with many questions unanswered,” Patrick Legland, head of research at Societe Generale SA, told Bloomberg Television today. “It’s kind of a catch-22 where they have to reduce their deficit but there is no growth. It’s very tricky.”

At stake is whether Greece wins the bailout, secures a debt write-off with private creditors and remains in the euro region. Finance Minister Evangelos Venizelos told reporters late yesterday that “failure of these talks, failure of the plan, the country’s bankruptcy, means even greater sacrifice.”

The euro rose 0.9 percent to $1.3254 at 10:16 p.m. Athens time after touching $1.3270, the highest level since Dec. 12. The Stoxx Europe 600 Index slipped 0.3 percent.
Elections Due

With elections due as early as April, Greek political leaders are arguing over demands such ensuring the viability of pension funds and reducing wage- and non-wage costs to boost competitiveness. Greece still needs to agree on 600 million euros of fiscal measures for 2012, a government official told reporters in Athens today.

Efforts to win a second bailout from the troika have hung in the balance over the past five days as negotiations in Athens failed to clinch an agreement on measures demanded by lenders, which may include a cut in the minimum wage, lower pensions and immediate layoffs for as many as 15,000 state employees.

Citigroup Inc. raised the probability that Greece will be forced to leave the euro area in the next 18 months to 50 percent from 25 percent to 30 percent previously.

Merkel said today that the impact of a Greek exit from the euro would be “incalculable,” and restated her determination to keep Greece in the single currency region.

“I don’t want Greece to leave the euro and therefore the question doesn’t arise,” Merkel said in a speech in Berlin. “I won’t take part in any effort to push Greece out of the euro. It would have incalculable consequences.”

Even so, Merkel said that there is “no way around” Greece carrying out reforms. Greece is in a “very complicated situation”, she said.
Museums Shut

Adding to pressure on Papademos and political leaders jostling ahead of the elections, about 10,000 people marched through the capital after the biggest public-sector and private- sector union groups, ADEDY and GSEE, held a 24-hour general strike. The walkout shut down government services, courts, schools, museums and ferry services. Dockworkers and bank employees also walked off the job.

The troika argues that lower wage costs and pension cuts are among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.
New Democracy

Antonis Samaras, the head of the second-biggest party, New Democracy, has indicated he will oppose measures that will deepen the country’s downturn. George Karatzaferis, the head of Laos, one of the three supporting Papademos, said he would seek assurances that the measures would lead the country out of the crisis and said the “aggressive humiliation” of Greece is unacceptable.

Guarantees from Greek political leaders such as Samaras, who leads in opinion polls, are key to securing the funds from the EU and IMF. International lenders want assurances that whoever wins the next election will stick to pledges made now to receive financing.

Samaras’s party has 31 percent support from voters, according to a Public Issue poll released today, compared with 8 percent for the socialist Pasok party, which is the biggest party in the current parliament. The survey of 1,002 Greeks showed a growing number of Greeks wanting elections immediately and waning support both for Papademos and the three parties that back him.
Rescue Blueprint

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange that will slice 100 billion euros off 200 billion euros of privately-held Greek debt and loans that will probably exceed the 130 billion euros now on the table.

Papademos met tonight for “constructive” talks with Charles Dallara, managing director of the International Institute of Finance, which has negotiated the terms of the swap and Deutsche Bank AG Chairman Joseph Ackermann, according to an IIF statement.

A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due. Parliament may be called to vote on the terms of the writedown on Feb. 12, state-runs Athens News Agency reported, without saying how it got the information.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

Dow Rises Toward Highest Level Since ’08

By Rita Nazareth - Feb 8, 2012 5:28 AM GMT+0800

U.S. stocks advanced, sending the Dow Jones Industrial Average to its highest level since May 2008, as Greece made progress on measures to secure international aid.

Seven out of 10 groups in the Standard & Poor’s 500 Index gained, helping the measure rebound from an earlier decline. McDonald’s Corp., the world’s biggest restaurant chain, added 1.4 percent ahead of its sales report. Yum! Brands Inc., owner of the KFC and Taco Bell fast-food chains, climbed 2.6 percent as earnings surged 30 percent. Anadarko Petroleum Corp. (APC), the biggest U.S. independent oil and natural-gas producer by market value, increased 5.2 percent as profit beat estimates.

The S&P 500 rose 0.2 percent to 1,347.05 at 4 p.m. New York time, wiping out an earlier decline of as much as 0.6 percent. The Dow advanced 33.07 points, or 0.3 percent, to 12,878.20.

“We need to see some real austerity from Greece,"Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. "When we see that, we will have more confidence that Europe is serious about growth. I have confidence that we’ll get some sort of resolution that allows for additional funding."

Greek Prime Minister Lucas Papademos postponed a meeting with heads of the political parties supporting his caretaker government a second time in as many days as the government and international creditors haggled over terms to secure a second aid package. Papademos will meet with the leaders in Athens tomorrow, instead of tonight as previously scheduled, a spokeswoman for his office said. In the U.S., consumer borrowing rose more than forecast in December.
Earnings Season

Today’s gain put the S&P 500 about 1.2 percent away from its peak nine months ago, which would send it to the highest level since June 2008. The index rose 7.1 percent this year amid better-than-expected economic data and corporate profits. Earnings beat projections at 68 percent of the 280 companies in the S&P 500 that reported quarterly results since Jan. 9, according to data compiled by Bloomberg.

The S&P 500 Consumer Services Index had the biggest advance among 24 industries, rising 0.9 percent.

McDonald’s added 1.4 percent, the most in the Dow, to $100.91. It may say tomorrow that sales at global stores open at least 13 months gained 5.8 percent in January, according to the average estimate of six analysts surveyed by Bloomberg News.

Yum gained 2.6 percent to $64.85. The company, with about 18,800 restaurants outside the U.S., said fourth-quarter sales at stores open at least 12 months grew 21 percent in China. Yum said it opened a record 656 stores last year in the Asian nation, where it gets more than 40 percent of its revenue.

Coca-Cola Co. advanced 0.8 percent to $68.55. The largest soft-drink maker reported fourth-quarter profit that topped analysts’ estimates as teas and juices boosted sales in Asia.

Anadarko climbed 5.2 percent to $87.21. Output rose 12 percent to the equivalent of 683,000 barrels of oil a day during the last three months of 2011, The Woodlands, Texas-based company said. Sales volumes climbed to 63 million barrels at an average price of $104.82 a barrel of oil and condensate, more than the $98 estimate from Raymond James & Associates Inc.

Cliffs Natural Resources Inc. rose 0.7 percent to $75.51. The iron-ore producer yesterday sold for 6.4 times its cash from operations, after deducting capital expenses, according to data compiled by Bloomberg. That was less than every other metals or mining company in the U.S. or Canada exceeding $5 billion in market value, and a 70 percent discount to the median.
Takeover Target

With Glencore International Plc and Xstrata Plc agreeing to merge to create a $90 billion global mining company, Cliffs may attract interest from BHP Billiton Ltd. or Rio Tinto Group, Lutetia Capital said. An acquirer could pay a 30 percent premium and still get Cliffs for less than any comparable publicly traded mining company versus its free cash flow, the data show.

"There could be more vertical integration” after Glencore and Xstrata, Mark Keller, chief executive officer of Confluence Investment Management in St. Louis, which manages $1 billion including shares of Cliffs, said in a telephone interview. As a result, “the first-rate mid-sized companies like Cliffs I think potentially become takeover targets,” he said.

Becton Dickinson & Co. slipped 3.8 percent to $77.51. The maker of medical devices and supplies cut its forecast for 2012 to no more than $5.70 a share, below an earlier projection of as much as $5.85 and the average analyst estimate of $5.80.

Walgreen Co., the largest U.S. drugstore chain, slumped 2.4 percent to $33.46. Citigroup cut its recommendation for the shares to “sell” from “neutral.”
Bull Market

A potential retreat in U.S. stocks will set the stage for the S&P 500 to approach 1,370, the level where the current bull market ran out of steam last year, according to analysts who study charts to predict market moves.

The S&P 500 had gained for five weeks through Feb. 3, the longest streak in a year, sending its 14-day relative strength index, which measures the degree that gains and losses outpace each other, to the highest level since February 2011, according to data compiled by Bloomberg.

“We need to pause, rest, consolidate in order to stay healthy,” Carter Worth, New York-based chief market technician at Oppenheimer & Co., wrote in a note yesterday. “Any such consolidation would cure the market from a tad unhealthy right back to very healthy, and would be the perfect ‘setup’ for a breakout-type move to new 52-week highs.”