The Monday Report

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By Greg Peel

Wall Street was off to a flier on Friday night, spurred on by the US jobs report. After a weaker than expected ADP report, and a sudden and unexpected jump in weekly jobs claims, economists were nervous that their 185,000 new job estimate was possibly ambitious. So a cheer went up when the number for April was announced as 244,000 additions.

There was, however, a downside. Jobs growth usually brings more job applicants out of the woodwork, who initially re-sign for the dole. Hence the unemployment rate rose to 9.0% from 8.8%. President Obama wasted little time in exploiting the actual jobs growth number nevertheless, riding high on a wave of new found respect.

The Dow jumped sharply on the open and by late morning was up 175 points. But then Greece dropped a bombshell. Or at least a German weekly magazine website dropped a bombshell by suggesting Greece was looking to pull out of the European Union so as to release itself from the shackles of its EU/IMF bail-out fund and subsequent austerity requirements.

There have been such rumours, or at least speculation, before. But Greek officials were quick to quash the suggestion, noting that there actually isn't any mechanism by which Greece could withdraw even if it wanted to, which it didn't. Denial or not, such talk sows seeds of doubt and has already led to talk of all of the indebted peripherals – Greece, Portugal and Ireland – filing for divorce. While that in itself is probably no great drama in global economic terms, it would no doubt signal the beginning of the end of the euro.

So the euro, which had already been hit the night before when the ECB didn't raise, was hit again. The US dollar index, which had copped a short-covering bounce the night before, bounced further – up another 1.1% to 74.92. Wall Street pulled on the reins, and by session's end the Dow was only up 54 points, or 0.4%, with the S&P also up 0.4% to 1340.

A move up of that magnitude in the greenback would usually result in lower commodity prices, but given commodity prices had been routed on Thursday the equation was not so straightforward. And a solid US jobs result also represents a positive. 

Oil dropped early, then reversed, then dropped again to the close. In the end Brent fell another US$1.67 to US$109.13/bbl and West Texas fell another US$2.62 to US$97.18/bbl. Base metals dropped early, but then reversed to close mixed and little changed.

Precious metals simply ignored the dollar as buyers came back in following Thursday's big dump, sending gold up US$20.90 to US$1495.40/oz and silver up 2.4% to US$35.62/oz. The Aussie should, by rights, have fallen as well, but the RBA put paid to that. The RBA's quarterly statement on monetary policy upgraded the central bank's inflation expectations to assume 3.0% core inflation will be reached by end-2011.

The result is that half of the economist community now believes the RBA will hike in June, while the other half is still tipping a second half increase. The Aussie dollar backed the first half and jumped 1.3% to US$1.0712. So much for Thursday night's relief.

The SPI Overnight rose 8 points.

After the markets had closed on Friday night, an emergency meeting took place between the finance ministers of Greece, Germany, France, Italy and Spain as well as the ECB president and an EU monetary official. It was billed as a “secret” meeting, with no invitations offered to remaining eurozone members, although the press knew all about it beforehand.

The meeting concluded that the austerity measures placed on Greece in exchange for its bail-out fund were indeed too onerous and oppressive, just as Greece has been saying all along. The deep economic recession imposed as a result of austerity counters any possibility of Greece being able to repay the fund, let alone repay its extensive sovereign debt. Members had been assuming Greek debt would fall in yield after the bail-out was implemented, allowing access to refinancing in the markets down the track. But the opposite has been true, with markets preempting the growing inevitability of debt restructuring.

A proposal was thus agreed to soften the terms of the Greek fund, push out its time frames and reduce the interest rate cost. Any concept of a “haircut” on existing Greek sovereign debt (simply reducing the principal owed at the expense of lenders) was dismissed but a milder form of restructuring, in which maturity dates are pushed out, was considered. The concept of Greece leaving the EU was nipped in the bud.

While the deal, which is yet to be ratified, suggests long-feared PIIGS debt restructuring is now upon us, the market has been preparing itself for some time. Another important point is that Portugal's bail-out package was not as oppressive as Greece's, and indeed looks more like what the new plan is for Greece. So there is in theory no need to assume a domino effect.

There is nevertheless every reason to assume the recent wind has gone out of the euro's sail, given a combination of the new Greece plan and a backing down of ECB hawkishness last week. This provides scope for the US dollar to rally further than it already has, which in turn means potentially more pressure on commodity prices, unless last week's correction is seen as a sufficient pullback to more meaningful representations of realistic demand/supply equations. It should also mean more relief for the surging Aussie, but then assumptions of RBA tightening ahead are acting as a counter-force.

It will be Australia's fiscal policy in the spotlight next week however, as the treasurer brings down the annual Federal Budget on Tuesday night. There will follow several days of analysis of the impact on individual stocks and sectors. The monthly ANZ job ads series will precede the budget today and the NAB business survey is released tomorrow. 

Tomorrow also sees the release of the monthly trade balance, in a week which brings trade balance data from China (Tuesday), the UK and US (Wednesday) and Japan (Thursday). On Thursday the local unemployment data are released.

Wednesday will see the monthly “data dump” from China, in which industrial production, retail sales, fixed investment and inflation numbers are announced for April. All eyes will be on the CPI, which the market is expecting to ease to 5.2% from March's 5.4%.

It's also inflation week for the US, with the PPI due out on Thursday and the CPI on Friday. Tonight sees wholesale trade, Tuesday the trade balance and monthly Treasury budget, Thursday retail sales, and Friday May's first fortnightly consumer sentiment measure. The Treasury will also auction US$72bn of three and ten-year notes and thirty-year bonds into a market which has once again been eager for supposed safe haven debt over the last couple of weeks.

On Friday the eurozone will release its first estimate of first quarter GDP.

On the local stock front, next week sees the AGM season ramp up further with highlights being Oil Search ((OSH)) on Wednesday and Boart Longyear ((BLY)), Mirabela Nickel ((MBN)) and Minara Resources ((MRE)) on Friday. CSR ((CSR)) will release its full-year result on Wednesday and Westfield ((WDC)) will provide a quarterly update, while Paladin Energy ((PDN)) will provide its quarterly result on Friday.

Rudi will make a regular appearance on Lunch Money on Sky Business noon Thursday. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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