The Week Ahead: Rate Rise A Given?

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By Greg Peel

To date, Australia has shown little impact from the apparent slow-down in the US economy, despite a lot of share market turmoil. The financials sector has experienced a falling of some of the weak, while the strong have remained robust. Unlike the US and Europe, Australia’s big “money” banks are relatively sound. The Australian economy is also robust, and business lending has not appeared to have abated. Capacity is strained, employment is full, and wage pressures are on the horizon. Inflation is ominous.

While banks have already increased mortgage rates by varying amounts to account for the increase in the global cost of funds, the Reserve Bank of Australia has indicated its enemy is inflation. Without any signs of a manifest slowing of the economy ahead, the RBA has little choice but to raise rates by 25 basis points to 7.00%. That is the opinion of nearly all economists, and will occur despite rates in the US having now fallen to 3.00% with a downward bullet.

As a rate rise is widely expected, and has been for a while, there is little chance of any specific effect being registered in the Australian stock market. The market bounced hard towards the end of last week, and appears set to open strongly again on Monday with the SPI Overnight indicating another 3.5% rally. The rate rise is “baked in”.

Over in Europe, the story is somewhat different. The UK and European economies are in grave risk of slowing, and according to some opinions may ultimately suffer a worse fate than the US. UK and European banks are hurting along with their US counterparts. Housing prices are collapsing. Sentiment has turned sour. But the UK and Europe are also facing significant inflation concerns – the same concerns Ben Bernanke is attempting to suggest don’t exist.

Since the beginning of the credit crunch, the Fed has cut its target rate from 5.25% to 3.00%. The RBA has raised from 6.50% to 6.75%. The Bank of England has cut from 5.75% to 5.50%, while the European Central Bank has remained steadfast at 4.00%. Friday night’s jump in the US dollar confirmed just how short the market is. Any cut to the EU rate in particular could spark short-covering in the dollar and long-dumping in gold. However, Trichet is a man of conviction, and inflation is also his perceived first problem.

The Australian data week kicks off with the December trade figures on Monday , along with the fourth quarter house price index and the TD Securities-Melbourne Institute inflation gauge for January. The rate decision is announced on Tuesday, as are December building approvals and retail sales. It all goes quiet for the rest of the week.

In the US, December factory orders are announced on Monday, and the ISM non-manufacturing index on Tuesday. Wednesday its fourth quarter labour costs and productivity. Thursday sees December consumer credit and pending home sales, and Friday December wholesale inventories.

The EU and BoE make their rate decisions on Thursday, which also happens to be Chinese New Year. It will be a week of distraction for the Chinese.

On the local front, the half-year result  season (and full-year for many) begins in earnest this week. The trickle this week accelerates next week and becomes a flood in the following two. Highlights this week include Newscorp ((NWS)), BHP Billiton ((BHP)) and Centro Property ((CNP)) . For a full result schedule, consult the FNArena calendar.

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