The Monday Report

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By Greg Peel

The positive mood of Thursday's session continued into Friday on Wall Street ahead of the long weekend, with the Dow closing up 46 points or 0.4% to be within 50 points of 13,000 – a level last seen in early 2008. The S&P gained 0.2% to 1361 while the Nasdaq slipped 0.3%.

As per usual, headlines from Europe dominated sentiment. The German, Greek and Italian leaders hooked up for a conference call on Friday and are now supposedly “confident” that the eurozone finance ministers will “find a solution to outstanding issues” when they meet tonight. Merkel's office issued a statement suggesting the ministers are expected to reach an agreement to give the Greek bail-out package the green light. The Germans have retreated from the idea of providing only a bridging loan to get through the March debt rollover lasting up until the April election.

That's still Part A of the bail-out, with Part B being the ongoing wrangling over the restructuring of Greek bonds held by the private sector. To that end it was announced on Friday that the ECB had manufactured an exchange of its existing Greek bond holdings – some E50bn – into new bonds. The new bonds would avoid the ECB taking a loss on restructuring but also a future profit, although the central bank would make an immediate profit on the face value of the new bonds. This profit would be channelled to the individual eurozone central banks holding Greek debt allowing them to effectively help reduce Greece's debt commitments.

The bond switch would also immunise the ECB from clauses within Greece's bond details that allow for forced haircuts for all bondholders even if only a majority are prepared to comply. All a lot of smoke and mirrors it would seem, and no word on what the European banks think about it all. It was nevertheless seen as a positive on Friday night.

What ever happens tonight in Europe, we won't have Wall Street providing any lead given the President's Day long weekend.

The other point of discussion on Friday were the US inflation data. The headline CPI rose 0.2% in January which was blamed entirely on a rise in the price of gasoline. The core CPI also rose 0.2%. Despite the rise, annualised headline inflation is now running at 2.9%, down from 3.9% in September. No evidence of runaway inflation nor much indication of deflation either. However, the core CPI has ticked up 2.3% which is its highest rate since September 2008. 

Strictly the Fed's comfort zone is 1-2% yet monetary policy remains firmly in the easy phase. The Fed's excuse is that it expects core inflation to moderate but questions are being asked as to how long such easy policy can be justified before an upside inflation spiral risk becomes real. Forget QE3, say some, including members of the FOMC, the salient point is as to when the Fed should begin to go the other way and reduce its balance sheet before it's too late.

Movements in other markets were fairly benign on Friday. The US dollar index and gold were little changed at 79.33 and US$1724.30/oz respectively while the Aussie has ticked down 0.3% to US$1.0720. Base metals closed mixed on smallish moves and while West Texas crude jumped US$1.75 to US$104.06/bbl, Brent fell US69c to US$119.50/bbl.

The SPI Overnight gained 6 points.

Obviously Europe will dominate this week's activity as usual. There will also be a lot of interest around what might happen if the Dow breaches the psychological 13,000 mark. It was close twice in 2011 but failed, and early 2008 also saw a bounce back to 13,000 that failed before the ultimate slide toward Lehman and history. 

Economic data in the US this week include the Chicago Fed national activity index and existing home sales on Wednesday, the FHFA house price index on Thursday and new home sales on Friday along with the fortnightly consumer sentiment measure. Over the week the Treasury will auction two, five and seven-year bonds.

The eurozone's estimate of the February composite PMI is released on Wednesday, Germany's IFO survey of business activity is released on Thursday and on Friday both the eurozone and UK will revise their earlier December quarter GDP estimates.

HSBC's "flash" estimate of China's February manufacturing PMI is out on Wednesday.

Australia's December GDP is due out on March 7 so between now and then we see various sets of quarterly data. This week brings the wage cost index on Wednesday and average weekly wages on Thursday. The RBA will release the minutes of its last meeting on Tuesday and explain further why it left its cash rate on hold, and Glenn Stevens will appear before the House Economics Committee on Friday. Westpac and the Conference Board will both provide their December leading economic indices on Wednesday.

That's all for local data this week because we will be enjoying the busiest week in the February earnings season. Today's release highlights include Amcor ((AMC)) and Lend Lease ((LLC)) but there are too may throughout the course of the week to attempt to highlight further. Please refer to the FNArena Calendar.

The results will keep flowing into next week before coming to an abrupt halt at the end of February.

Ruid will appear on Sky Business on Thursday at noon and later that day on Switzer TV.

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

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