Interest rates will fall by 0.25% to 7% for the cash rate at 2.30 pm next Tuesday and by the close of business, the National Australia and ANZ Banks will have followed suit. They have promised to follow any RBA cut as quickly as possible. A quarter of a per cent drop in rates is now more likely after the better than expected capital spending figures for the June quarter and the year to June (which included significant upward revisions in spending in both the December and March quarters). So will it be time to go shopping? David Jones and other retailers would love us to, but there are still too many imponderables out there. Caution is the watch word, and besides the rate cut is well and truly been priced into the market. We still have business inventory figures to go and the June quarter balance of payments which both provide us with an idea of how much contribution (if any) business inventories and trade could make to growth. On balance, trade should be a small positive given the sharp rise in export income from higher oil, gas, coal and iron ore prices that have already produced two months of trade surplus in the quarter. And business inventories could be a touch higher than expected because of the slowdown in retailing and consumption which has happened a bit quicker than expected. But these are the two imponderables that make it hard to forecast. Some economists say that the gross domestic product could be flat to up 0.4% in the quarter, which would represent a slowdown on the higher rate in the March quarter when GDP rose 0.6% from the December quarter for an annual rate of 3.6%. But that’s exactly what the RBA has been engineering. But interest rates will fall Tuesday in what will be followed later in the year by a second cut of 0.25%; or if the RBA decided on a first up 0.50% cut, there wouldn’t be a further cut until the first quarter of 2009. The bank bill market has 30, 90 and 180 day bills all trading under the cash rate of 7.25%, and there’s a 35% chance of a cut of 0.50%. The RBA still has to balance growth with inflation which it expects will hit an annual 5% rate this quarter and possibly in the December quarter, although pressures do seem to be easing with the drop in oil and petrol prices. But higher rents and building costs are still big drivers of inflation in the economy. In the US second quarter growth was revised upwards to 3.3% annual from 1.9% because of a surge in exports and a plunge in imports: without the trade figures, the economy barely grew, and expectations are for a very sharp fall this quarter as reality sinks home. But in Australia, yesterday’s June quarter and 2007-08 capital spending figures from the Australian Bureau of Statistics provided a real positive surprise. Economists had been expecting a rise of around 2% in seasonally adjusted terms in the quarter, but it came in at 5.7% and the March fall was revised to a 1% increase. The ABS said there are now signs of a noticeable expansion of downstream processing investment from the mining boom. However, a couple of economists say the figures don’t sit with business confidence surveys and business borrowing, which are both declining. The ABS’s figures show that new capital spending hit a record $86.4 billion in the year to June, and the third estimate of capex for the current financial year has risen 26.2% to just under $100 billion at a massive $99.758 billion, which looks like rising further as the year wears on, despite some signs of deferred investment. The ABS said this morning that the “seventh and final estimate for 2007-08 for total capital expenditure is $86,404 million.  “This is the highest seventh estimate on record and has shown an increase of 11.4% from the final estimate for 2006-07. “There has been growth in both asset classes, particularly building which rose 17.4% while equipment rose 6.6%. The seventh estimate is 1.6% below the sixth estimate. A 1.3% rise in equipment was offset by a 4.7% fall in the building asset class. “The third estimate for 2008-09 is a series high at $99,758 million which is 26.2% higher than the same measure for 2007-08. “The third estimate reflects some deferral of planned 2007-08 spending and reveals some spread of investment intentions into downstream industries connected to mining. “Both asset classes have shown substantial growth when compared to the third estimate of the previous year with building rising 29.5% and equipment rising 22.5%. “The third estimate is also 14.5% stronger than the second estimate for 2008-09. Building has risen 15.1% and equipment 14.0% between the second and third estimates.” The June quarter itself saw a rebound from the surprise dip in the March quarter (which was revised up anyway by the ABS with new spending found and re-allocated) to show a 1% growth instead of a 2.6% fall. The ABS said that total new capital expenditure rose a seasonally adjusted estimate rose 5.7% in the June quarter.  Economists had been looking for a 2% rise, so the news is encouraging and means that economic growth will be a bit better than some analysts had thought. “Equipment, plant and machinery rose a large 8% in seasonally adjusted terms, but the seasonally adjusted estimate for spending on buildings eased half a per cent in the quarter,” the ABS said.

Plant and machinery spending accounts for some 8% of GDP, according to Macquarie Bank interest rate strategist, Rory Robertson. 

He says it means the economy grew bit quicker in the second quarter than thought.

The ABS said that the March quarter 2008 estimate for capital expenditure has been revised upwards $563 million or 2.9% in original terms. December quarter figures were also revised upwards by a similar amount.

A solid rebound in capital spending should mean fears for a larger than expected slowdown in second quarter economic growth will be averted.

Figures out Wednesday on new construction work done, thanks to a 6% drop in engineering work done in the quarter, suggested that the construction, engineering and building sectors would be making a flat contribution to second quarter growth. 

But total construction work done was still up nearly 6% year on year in the June quarter, will make a substantial overall contribution.

The ABS said that projections for capex growth out into the current financial year suggested that there was a strong build up still under way to where spending would total around $30 billion a quarter.

“Renewed strength in the trend series for total capital expenditure, including upwards revisions for March support the anticipated movement of projections towards the $30,000m expenditure per quarter level by the end of the 2008-09 financial year,” the ABS said.

Driving this is an upturn expected in buildings, according to the ABS:

“The projections for the building asset class are very strong for the coming twelve months and are the main driver behind the strength displayed in the projection for total Capex. 

“The projections anticipate an upturn in the pace of growth in the building series in the year ahead. ”

Manufacturing will be weak; mining will be strong, as will investment in machinery and plant.

In a note to clients earlier in the week economists at Merrill Lynch expressed caution about the 2009 outlook.

“The initial phase of rate cuts will only be designed to loosen the brakes on the economy.”Lower rates will help mitigate downside risks to the economy next year, but fundamental forces suggest growth will remain below trend in 2009, including;

“Still restrictive financial conditions: even allowing for our forecast of 100bp of easing to 6.25% by June next year, monetary conditions will remain on the restrictive side of neutral. Policy works with a lag and financial conditions are adjusting from their tightest level since the late 1980’s.”

We have already seen a growing number of companies, especially in the property and financial sectors, plus some in building and building supplies, express their own caution about the next year: they termed it a “lack of visibility”

Wattyl, Boral, Stockland, GPT are just some that come to mind.

In contrast the likes of retailers JB Hi-Fi and even little Noni-B, which had a poor 2008, see earnings growth and have been confident enough to say so in their outlook statements. David Jones is expecting flat growth in this year, but earnings growth much faster and even Woolies sees sales growth in the ‘high single digits’ and earnings growth of up to 12%.

Merrill Lynch continued: “Income and balance sheet constraints on the household sector.

“We do not expect a strong rebound in household spending through 2009. Household incomes will be constrained by weaker employment and real income growth.

“The household debt servicing ratio is at a record level, as is the change in the ratio over the past 12 month (see chart below). Debt servicing will show little improvement during the initial phase of rate cuts because income growth will also be slowing.

“Real asset prices are falling at the steepest pace since the early 1990’s recession, eroding household net worth

“Weaker global growth, with ML forecasting below trend growth of 3.4% in 2009, down from a forecast 3.9% in 2008 and 4.8% in 2007. Demand growth is slowing substantially in the developed world. In developing economies, inflationary pressures (and tighter policy settings), together with weaker developed world demand, is moderating growth.

Goldman Sachs JBWere: said that 2008 is shaping up as the worst year for returns from listed property, Australian shares, alternative assets and residential property since comparable data became available in the mid-1980s. Not even in the depths of the early 1990s recession or the 1987 crash did wealth destruction occur on terms of this breadth and depth.

The Australian equity market is overshooting domestic economic fundamentals and is now discounting a recession of an order of magnitude similar to the early-1990s.

However, our forecast of a solid recovery in equity returns in 2009 is based on;

1. An oversold starting position. History suggests a strong recovery in the year following a negative return from equities (15% average nominal return since 1885, 28% since 1985).

2. Consensus has now largely adopted our macro views for growth and inflation and hence we believe that market expectations have been reset, and indeed the market now appears to be factoring in a more bearish outcome than we think is likely.

3. Interest rate easing cycles in the past have generated an average return of 13% 6 months after the commencement of an easing cycle and we believe the Federal government will begin to put in place a highly stimulatory Budget in 2009.

4. Based on our review of relative risk aversion, equities stack up as the cheapest relative to other asset classes.

5. The rally in Australian fixed interest markets is drawing to conclusion and Australian bonds are now fairly valued based on our views on growth and inflation.

Based on our current top-down GDP estimates, a flat or slightly negative EPS growth outcome for the Australian market can be expected for the 2008-09 year. In contrast the equity market appears to be pricing in a much harder landing than we think likely, suggesting a 15% EPS decline on a discounted 12-month-forward PER multiple of around 11-12 times.

Midday Market Roundup 18/08/08
August 18 2008 - Australasian Investment Review – (AIR)

We have started off the week OK – up 36 – the SFE Futures suggested an 8 point fall in the market this morning. Resources up 1.4%, Financials up 0.4% after another 6% fall from Babcock & Brown this morning with Babcock & Brown Power down 30.6% on news of a big provision. MQG also down 2.6%. Market is waiting for BHP Billiton’s result – Last year they came out at 3:55pm. Expecting record $15.7bn profit. Commentary on China all important and will set tone for the resources sector which has fallen over 25% since May 19th.

Wall Street finished higher on Friday – up 44 – The main point was oil and commodities down again on a rising US dollar. Goldman Sachs says the US dollar has bottomed. Continuing credit-related concerns amidst multi-billion-dollar buybacks of Auction Rate Securities plus some weak economic numbers.  Wachovia announced it will buyback $8.5bn worth of auction-rate-securities and pay $50m in fines, retailers close up 1.8% on better-than-expected 2Q results and the University of Michigan’s July consumer sentiment figures were up less-than-expected – suggest an economy still under pressure.

• Both BHP and RIO down 1.77% in ADR form on Friday.
• Metals mixed – Zinc up 1.33%, Aluminium up 0.22% and Nickel down 2.2%. Copper down 0.04%.
• Oil price down $1.59 to $113.46 on growing concerns about demand in industrial nations and the stronger dollar. Woodside up 122c to 5542c.
• Gold down $22.30 to $788.40. Newcrest up 40c to 2483c.
• US Bonds up with the 10 year yield down to 3.84% from 3.90%.

We have a busy week ahead with a host of results as we get into the guts of the reporting season. Most notable companies reporting include: Tuesday: CSL, Boral, Newcrest Mining, Wednesday: Coca-Cola Amatil, Perpetual, AGL Energy, Thursday: Amcor, Tabcorp Holdings, QBE Insurance and on Friday we have Wesfarmers, Caltex and Boral.

Results Today…

• Ansell’s (ANN) – GOOD - Final result has come in better-than-expected. FY net profit up 2.6% to $102.6m, better than $97.2m analysts’ had expected. Declared a final dividend of 15.5c. ANN up 5c to 1129c.
• Seek (SEK) – BELOW EXPECTATIONS - Has announced a 37.4% increase in FY net profit to $76.3m, stronger than UBS Warburg’s forecasts of $75m but below Credit Suisse’s bullish prediction of $80.7m. GSJB Were expected $78.1m. SEK up 5c to 514c.
• BlueScope Steel (BSL) – GOOD - Announces an underlying profit of $816m, up 27%. UBS Warburg expected $728m. After significant items, FY profit came in at $596m, down 13%. Declared a 27c final dividend, up from 26c last year. BSL unchanged at 1329c.
• Sino Gold (SGX) has posted a net loss of $2.6m compared to the $3.12m loss announced last year. Revenue of $100.2m. No dividend. SGX down 13c to 421c.

Other Announcements

• Babcock & Brown Power (BBP) announced it will take a total impairment charge of $452m relating to the takeover of Alinta. Reaffirmed EBITDA and has realized $40m from its decision to sell its Tamar power stations project. BBP down 30.6% to 30c.
• Babcock & Brown (BNB) has also confirmed its interim result guidance saying the guidance (profit warning) last week included the impact of the impairment charge. BNB down 19c to 426c.
• Talk of Commonwealth Bank of Australia making a $6bn plus takeover offer for BankWest having pulled out of the race to buy ABN AMRO’s Australian investment banking operations. CBA down 104c to 4265c.
• Straits Resources (SRL) announced they will sell their coal assets – Madagascar and Brunei - to its subsidiary Straits Asia for US$100.3m. SRL down 12c to 488c.
• Emeco Holdings (EHL) has successfully executed a 3 year $630m senior debt package. Cost of debt up 130bps after the refinancing. EHL up 0.5c to 109.5c.
• Perpetual (PPT) says funds under management fell slightly in July to $30.2bn from $30.3bn in June. PPT up 205c or 4.6% to 4705c. 
• Allco Finance Group (AFG) announces Credit Suisse Group has agreed to waive Rubicon America Trust’s (RAT) financial covenants and obligation to make a debt repayment until August 22. AFG unchanged at 48c.
• GSJB Were maintain their OUTPERFORM recommendation on Crown (CWN) and 1060c target price ahead of its result tomorrow. CWN down 1c to 825c.
• Fairfax Media (FXJ) only down 2c to 273c despite Citi cutting its target price on the stock by 22% to 291c from 371c. They say advertising outlook in New Zealand and regional Australia looks soft. FXJ down 2c to 273c.
• No indication from Treasurer Wayne Swan as to whether the government will approve Westpac’s (WBC) bid for St. George (SGB). He has also told the banks to follow the RBA’s lead and cut rates if the RBA does reduce interest rates at their next meeting.

Another weekend and another announcement from Rio Tinto as it continues to blitz the markets with announcements about what it is and isn’t doing.

This time it revealed it was considering listing its North American coal assets on the New York Stock Exchange as Cloud Peak Energy Inc.

Rio said it had filed plans with the US Securities and Exchange Commission for an initial public offering worth up to $US1 billion ($A1.1 billion).

However, Rio Tinto indicated that this was only a preliminary move and that it might not move towards full listing, or pursue a different form of divestment.

A final decision would be made “once these options have been more fully explored,” it said in the latest statement.

Rio Tinto said in November it was exploring the possible sale of some or all of its US coal assets to help pay debt used to purchase Canada’s Alcan.

“We are in active discussions with a number of prospective buyers who have expressed strong interest in those coal assets,” chief financial officer Guy Elliott said in a statement.

The SEC filing did not reveal the number of shares the company planned to sell or their expected price.

Rio said that Cloud Peak Energy comprised most of the North American coal assets of Rio Tinto Energy America, and is the second largest producer of coal in the U.S. and in the Powder River Basin, operating three of the five largest coal mines in the region.

The Powder River Basin is a major thermal coal producing region in the US. There are around 35 major mining operations spreading through parts of Montana in the West of the country.

Cloud Peak’s Powder River Basin mines in Wyoming and Montana are huge: they supply 11.5% of the US domestic market for coal, generating 6% of America’s electricity.

Cloud Peak would exclude Rio’s Colowyo coal mine in Colorado and the Sweetwater uranium assets, which Rio has already said it would sell Sweetwater.

The lead underwriter for the offering is Credit Suisse Securities (USA) LLC.

BHP Billiton shares lost four cents to $37.15 in Australia on Friday, while takeover target Rio Tinto shares added $1.00 to $116.00.

Westpac shares gained more than 1% Friday after it revealed it had escaped the worst of the credit crunch and was looking for a 6%-8% rise in earnings for the full year.

It’s now the country’s second largest bank by market capitalisation after the Commonwealth, which reports its full 2008 financial year results this Wednesday.

CBA shares eased on Friday ahead of the result and investors will continue to be uncertain until they see the actual figures from the bank. Expect a solid profit rise, even after a rise in bad debts. 

The CBA is a big lender to the Centro Properties group which is now in break up mode to try and restructure to repay debts.

Westpac said in a statement on Friday that full-year cash profit, which excludes income from derivatives trading, will increase up to 8% in the year to September 30, on revenue growth of up to 9%.

That’s in stark contrast to the lower profits expected from the ANZ and the National after both announced big write-downs.

Westpac said it will maintain a conservative risk profile and is on target to complete its planned takeover of St. George Bank which updates the market tomorrow.

Westpac CEO, Gail Kelly said the bank was continuing to do well despite the slowing growth now being reported across the economy.

“Managing risk remains a priority for us and we are maintaining our strong lending and credit risk disciplines,” she said in a statement.

“We are not distracted by problems in our credit portfolio, enabling to us concentrate on our strategic agenda.”

Profit could drop by up to 30% this year as competition intensifies from the likes of Telstra and Vodafone.

The once dominant Telco is having to build new new broadband and mobile networks and cut prices to meet the rising competition from its rivals.

Telecom shares dropped more than 10% on Friday, the largest one day fall in 11 years.

The company says 2009 earnings will fall to between NZ$500 million and NZ$540 million in the 2009 year.

The company’s dividend payments will fall to 6 NZc a share in the first three quarters of fiscal 2009, compared with 7c a year earlier. All 2009 dividends will be paid without tax credits.

Telecom plans to increase capital spending to NZ$1.1 billion this year to finance the new networks.

It won’t be as dramatic a week this week as last week was with four leading central banks meeting; our bank’s signalling a rate cut as soon as next month, and then the Europeans ruling out a rate rise sparking a major rise in the value of the US dollar, which was already on the turn.

Our dollar was pummelled, which will be a major theme here this week, along with June 30 companies reporting season hitting full speed. 

Oil prices should be watched closely to see if the fighting in Georgia and South Ossetia involving Russian troops, stops the recent fall in world prices (it had no impact Friday).

And, as usual, there will be some important statistics to worry about, including US consumer price inflation, European economic growth and here the third Statement on Monetary Policy from the RBA, which is out later today.

It will be be watched closely for more clues about how strong the Bank’s new found rate easing bias is.

The Bank will flesh out last Tuesday’s post rate decision statement from RBA Governor, Glenn Stevens.

The AMP’s chief economist, Dr Shane Oliver says “Our assessment is that the RBA is likely to indicate increasing downside risks to its growth forecasts and increased confidence that inflation will fall which will help reinforce expectations for interest rate cuts in the months ahead, albeit maybe not to the same degree as that already priced into the money markets”.

Of interest to the RBA will be this week’s wages price index and average weekly earnings figures for the June and May quarters respectively.

The consumer confidence figures from the Westpac-Melbourne Institute will be released and the latest monthly survey on business confidence from the National Australia Bank. Both should show a small gain perhaps in confidence on the back of the downturn in oil and petrol prices and last week’s talk about lowering interest rates.

The June half profit reporting season will also start to gather pace with stocks such as Cochlear, the Commonwealth Bank, Computershare, Telstra, Leighton and Stockland due to report.

The CBA, Telstra and Stockland will be the most watched: the CBA for banking and if it has missed most of the bad news, like Westpac revealed on Friday; Telstra because it has so far escaped most of the chat about poor results as it is not in finance, or resources; and Stockland which, of the major property investors, has so far been silent on what’s been happening to its business from the slump in financial engineering and geared property sectors.

The AMP expects profit growth for 2007-08 to have come in pretty weak at around +3%, down from +15% in the previous financial year.

According to Dr Oliver the economic backdrop to this reporting season is the toughest since 2000-01 as growth has slowed sharply and costs have picked up.

“All sectors, including resources which have been hit by rising costs, are likely to report soft results for 2007-08.

“However, while the results are unlikely to be the disaster the market is currently priced for after its 30% slump from last year’s high, the focus is likely to be on the outlook statements from companies and these are likely to be disappointing.

“While market expectations for 60% growth from resources in 2008-09 are reasonable given the latest surge in coal and iron ore prices, consensus expectations for 5 to 10% growth in the rest of the market are likely way too strong and will be revised down.

“The Commonwealth Bank’s result will likely be a key focus given the increase in debt provisioning at NAB and ANZ recently.”

In the US, data for the trade balance, retail sales, consumer prices, consumer sentiment, industrial production and a couple of business surveys are due for release.

The retail sales figures will be watched closely to see if the spate of disappointing reports last week from leading chains on July growth reflects the entire retailing sector’s performance for the month.

Wal-Mart’s latest quarterly earnings and more retailed commentary also leads off a string of financial reports from the sector, which will help reinforce the message from the retail sales numbers.

US consumer prices rose 5% (annual rate) in June. Any advance on that will get markets a bit anxious, even though the Fed ruled out a rate rise (while warning of the risks from higher inflation).

It also ruled out a rate cut to further soften the downside risks to growth, which in the minds of many analysts, remains the bigger of the two dangers to the US.

Reuters and Bloomberg polls top a US CPI headline rate of 0.4% for July, compared with June’s 1.1% for June alone.

The CPI is out Thursday night in the US, our time. Tuesday sees the US trade deficit for June, Wednesday retail sales and import prices and business inventories (for June) and on Friday consumer confidence and industrial production.

 
MONDAY:

The Reserve Bank releases its third Monetary Policy Statement of the year at 11.30 am; The Australian Bureau of Statistics (ABS) releases Lending Finance figures for June. Final profits from United Group, Crane Group, Bendigo Bank; Dexion interim; Housing Industry Association (HIA) June quarter national and state outlook

 
TUESDAY:

Final profits from Bradken, Cochlear and Worleyparsons; interims from APN News and Media and Australian Agricultural Co; National Australia Bank monthly business conditions survey; St George Bank briefing; Singapore Telecom/Optus first quarter results.

 
WEDNESDAY:

The ABS releases the Labour Price Index for the June quarter; final results from Telstra, the Commonwealth Bank, Fletcher Building, Computershare, Specialty Fashion group, Talent2, Boom Logistics and Pharmaxis; Westpac/Melbourne Institute consumer sentiment survey.

 
THURSDAY:

The ABS releases Average Weekly Earnings figures for the May quarter; final results from Leighton, ASX, Stockland, PMP, Futuris and Reverse Corp; David Jones full year sales figures.

 
FRIDAY:

Final results from Biota, IDT Australia and SAI Global; Babcock and Brown Japan Property Trust annual results; June quarter housing affordability report from the HIA and Commonwealth Bank.

Rates On Hold As Economies Look To Slide

A year after the crunch hit, the world economy is looking tattered around the edges and growth is searching for new lows. Inflation and unemployment are both on the rise as growth heads south, along with house prices and the prices of a wide range of other assets. Now the question in more and more economies is; has the recession started? The ‘R’ word is already being used to describe Japan, New Zealand and parts of Europe.  Next the UK, the US (which has already flirted with a contraction in the last quarter of 2007) and Australia? Overnight the Bank of England left its key interest rate on hold at 5% as it watched the British economy slide further.  In doing that it joined the US Fed and the Australian Reserve Bank in resisting any urge to change rates. And the European Central Bank also left its key rate steady at 4.25% and questioned whether growth in the eurozone would hold up in coming months. The answer to that query seems to be ‘no’.. But while the European, UK, British and Australian economies are all showing signs of weakness, only the RBA had to policy room to switch to a rate cut stance, and signal it vigorously. The Reserve Bank publishes its latest economic and inflation forecasts next Monday and the Bank of England does likewise. It will be easy to see from reading both statements, just which is the better placed economy (Australia) and which central bank has more room to move in future months to accommodate any further weakness (Australia). The UK remains strangled by plunging house prices.  The house price index published by the mortgage lender Halifax on Thursday showed prices fell a further 1.7% last month, contributing to a year on year fall of 11% for an average house. That means prices have returned to the level they were at more than two years ago. Investment bank, UBS has dropped its world growth forecast and says global economy is “precariously close” to a recession in 2009. UBS said as it cut next year’s global growth forecast due to the continuing US slowdown. UBS said it sees the world’s gross domestic product growing by 2.9% next year, down from an earlier prediction of 3.1%. UBS said it considers a 2.5% global growth rate as one that is consistent with a recession. “Softer global economic activity for longer suggests peaking and then declining inflation. A sustainable recovery of ‘risk’ assets probably requires policy recognition that the primary macroeconomic challenge remains weak growth, not temporarily high inflation.” “After some rather dismal high frequency data, especially the surprisingly weak US consumption data, we have decided to shave our US average growth forecast for 2008 by 0.3 percentage points to 1.3%. “Our expectations for the business cycle this year remain unchanged: negative or insignificant growth rates in the first half, a rebound in the third quarter and a return to low growth at year-end and into 2009. “Europe’s business cycle trails the US cycle by two to three quarters. “We have trimmed our 2009 growth forecasts in particular, down from 1.7% to 1.2% now for the EMU. “We have also downgraded Japan in view of its uninspiring domestic demand data as well as the strengthening of the yen. Growth in the large emerging markets remains healthy so far.” “Until policy stances shift, credit and equity markets will have to contend with cyclical weakness and probable earnings downgrades, in particular for 2009 estimates.” According to a report from the IMF on July 17, the global economy will expand 4.1% in 2008, and 3.9% next year, as it increased its estimates from projections in April.   The European Central Bank (ECB) left its rate steady as it, like the US and the UK had to face up to the twins problems of a slumping economy and persistently high inflation.The ECB lifted its rate by 0.25% last month and there are those still wondering if that was a rise too many. Those who say that point to economic activity across the region slowing, especially in Germany where second quarter growth is almost certainly to have contracted by around 1%. At 4.1% inflation in the eurozone is more than double the ECB’s target of “close to, but just below 2 per cent”, but it’s less than the US rate of 5%, and Australia’s rate of 4.5%. German manufacturing orders intake dropped 2.9% in June from May: UBS said this was the seventh consecutive drop in orders and the result was much weaker than expected. “(The) weakness was driven largely by foreign orders, especially from other Eurozone countries. The numbers bode ill for production in coming months.” Germany seems to have hit a big hole as its export driven economy is hit by the growing global slowdown. German economic growth will be down when the second quarter figures are released shortly, compared to strong growth in the first three months.    In London The Bank of England decision on rates was overtaken by the International Monetary Fund which delivered some bad news to the British Government that the BoE has undoubtedly delivered, but not been acknowledged.The IMF slashed its growth forecasts for the British economy and said that high inflation argued against a cut in interest rates by the Bank of England. The central bank obviously listened to that part of the IMF message. The Fund now expects 2008 economic growth to be an annual 1.4%; falling to just 1.1% next year: that’s down from the 1.8% and 1.7% forecasts last month. “So far in 2008, evidence points to a sharp slowing in activity alongside higher inflation,” the IMF said in a report on the UK economy. The report made no reference to a recession, which an increasing number of economists are predicting. The IMF forecasts for growth differ from those of the British government, which still sees expansion of 2.0% this year, rising to a giddy 2.5% in 2009. The IMF argued that there was little room for easing interest rates despite the boost that such a move would give to economic activity. “Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present,” said the report. UK inflation jumped to a 16-year high point of 3.8% in the year to June (still under the 5% in the US and 4. 5% here, though). But the Bank of England policy makers decided that the least-worst option is to do nothing. They are a bit like rabbits looking at the soaring inflationary pressures, and the plunging economic performance, especially in housing. The nine-member Monetary Policy Committee, led by Governor Mervyn King left the key UK interest rate at 5% for a fourth month in a row. That’s despite the news of another big fall in UK house prices. A year after global credit crunch erupted and markets seized up, Britain’s economy is on the brink of a recession, and inflation will soon more than double the 2% central bank target. UK services, manufacturing and construction shrank in July, consumer confidence again fell and house prices continue to fall: much like America.   The Fed stayed its hand on interest rates this week, worried by both the continuing credit crunch driven recession and the still concerning level of inflation.So the Federal Funds Rate remained unchanged at 2%. In Australia the Reserve Bank also left rates unchanged but sent the clearest signal for seven years that rates would fall, with September nominated by the market for a cut of up to 0.50%. Inflation remains a concern and domestic growth is rough, but the iron ore, coal, oil and gas sectors are holding up the economy. Japan sort of wandered into recession and South Korea put up interest rates while closer to home New Zealand seems poised to enter a recession (see below for reports). In the US we got more reminders of just how far the US housing industry still impacts on financial groups and raised the strong possibility that worse was the come. And July retail sales were poor in the US as the tax rebate boost faded: even Wal-Mart cut its outlook. Expect more poor news in the coming weeks. Citigroup reached a huge $US20 billion-plus settlement to make a securities problem with authorities go away: it will probably mean a third quarter loss. And the world’s biggest insurer, American International Insurance Group (AIG) and the US mortgage insurer, Freddie Mac revealed write-downs and losses on housing-related securities and other bits of paper of more than $US15 billion. AIG had losses of more than $US12 billion, Freddie Mac, over $US3.5 billion. AIG reported a $US 5.4 billion second-quarter loss, but more worrying was the news that underlying earnings (excluding the write-down losses) fell into the red by far more than analysts had speculated: $1.32 billion as rates fell and the credit crunch hit returns on the insurers own funds (something we have seen here with Suncorp and IAG). Overall AIG’s loss represented a near $US10 billion turnaround from the $US4.28 billion second quarter profit last year. Its shares fell sharply Thursday night in the US. But it was Freddie Mac, the smaller of the two quasi-US Government sponsored companies (Fannie Mae is the other) which stunned US markets with a loss and write-downs much larger than anyone had thought. It lost $US821 billion in the second quarter, and the shares again fell. The company now has a market capitalisation of $US4.6 billion at the end of trading this morning. That’s supporting over $US1 trillion in mortgages. The group slashed its dividend to just 5 US cents a share and will save $US500 a year (why didn’t it just cut it completely?). It said it could raise $US5.5 billion in fresh capital, right now, but the market conditions were not welcoming. But that would see existing shareholders suffer a 100%-plus dilution But the real message from Freddie Mac’s result was buried in the detail. For the first time it has started writing down the value of home mortgages in its so-called AltA class: they are better quality than subprime, but are not prime mortgages. It wrote those down by $US1 billion, and provided a further $US2.5 billion for more credit losses in other parts of its mortgage portfolio. Freddie did this because it sees a deteriorating outlook for house prices and delinquencies and it is preparing itself for even worse news on falling home prices. Freddie reckons that America’s housing crisis was only at its half-way point, with prices expected to decline nationally by up to 20% before the market stabilises. Freddie estimates that US house prices have fallen by about 9%, while the broader Case/Schiller index says they are down 15.8% over the past year to June.   Japan might be in a technical recession, but such is the country’s unreliable statistics, that it could be merely emulating the US and bouncing along the bottom of a nasty trough. The Government has now conceded that the economy is “deteriorating,” an admission that the economy has entered a downturn. This compares to its assessments for April and May when the government said that that, “a change in the phase of the economy may have taken place.” But unlike what the US, UK, parts of Europe and Ireland are experiencing (and they are not officially in a recession), Japan is merely going through a period of sub par growth, but Japanese standards. Unlike the US or the UK, Japan is not suffering from a house price bubble or credit crunch: its banks have escaped much of the damage done to those in the US and UK. Export markets in Asia are still growing, slowly and yes exports to Europe and the US have turned down (the US for 10 months now), but the economy doesn’t need any pre-election stimulus from a nervy government desperate to buy its way back into Japanese voters hearts, nor does business need a big dollop of help. Japanese business is on the whole, trim, financially fit, with low debt, and capable of powering through the slowdown. Apart from groups (fishing people) hurt by high energy prices and higher food costs, the Japanese economy is in mostly good shape;if you exclude the still huge central government deficit and years of inept reform we in Australia have subjected ourselves over the past two decades. The usual definition of a recession is two consecutive quarters of negative growth, but in Japan first quarter growth was an unusually strong 4%, so two negative quarters, and even a third that’s negative, won’t change very much. In the long recovery and expansion period now coming to an end (in the minds of the Japanese Government) Japanese growth barely broke above 3%. The usual range was 1-3% a year, so a year of 1% or even half a per cent growth is not the end of the world. Inflation is a problem for everyone and will continue to intensify until the end of the year: but its relative, Japanese core inflation (after food and energy is discounted) rose by 0.1% in June. That’s higher than the near endemic deflation we saw for much of the past decade or more. But activity in Japan is slowing: industrial production has now fallen for two quarters in a row; consumer confidence has fallen, wages a falling again and exports are weak. It’s more a list of missed opportunities rather than direct consequences of some tremendous economic blow of the kind the US and Europe are reeling from. Compared with a long list of countries like Ireland, New Zealand, the US, UK or Spain or Italy, (which are battling inflation a housing slump and the credit crunch which won’t relax its grip), Japan’s problems are minor. Much like ours in Australia at the moment. Japanese companies are still exporting, though not to the easy market that was the US in the same quantity. Toyota’s latest figures are testimony to the damage the US has done to Japanese exporters (See below). But job demand is still stronger than it was in the 2001 recession, machine tool orders fell in June, but by far less than expected (2.6% down compared to expectations of a 9.9% slide). The bank of Japan will come under pressure to cut its key rate from the present 0.50%, but there’s really no need, even by Japanese standards.   Toyota stayed out of the red in its first quarter to the end of June; unlike its big US competitors and it’s more confident about its outlook than BMW, Ford, GM and a clutch of competitors. BMW reported a surprise 44% drop in first quarter earnings and abandoned its 2008 profit forecast; Toyota revealed a 28% drop in first quarter profits but maintained its full year estimate. It was the second quarter in a row that the car maker’s profit had fallen short of the same quarter of the year before. The final quarter of the 2008 year saw earnings down. The fall in the world’s biggest automaker’s quarterly net profit was less than forecast, but the damage from the strong yen and the massive slump in US car sales was still there for all to see. While Toyota’s sales in China, Russia and the Middle East are growing faster than forecast, the company and other car groups face a downward sales spiral in North America, Western Europe and Japan, the weaker dollar that drags on earnings, and dearer raw materials (especially steel and plastics). And then there’s oil which is making life miserable for car groups in every western economy. Toyota last month cut its 2008 global production and sales forecasts and outlined plans to shut US plants building light trucks such as the Tundra pickup. Toyota is switching one of these plants to the production of the Prius hybrid in the US from around 2010. The carmaker cut its 2009 financial year sales forecast to 8.74 million from 9.06 million. It dropped North American sales forecast to 2.63 million from 2.77 million. In America Toyota is heading for its first fall in annual sales since 1995. Falling demand for trucks and sport-utility vehicles caused Toyota’s US retail sales to fall 7.8% last quarter, led by a 20% drop in demand for light trucks. Toyota joined rivals Honda and Nissan in reporting damage to first quarter figures from the US slump. Toyota’s April-June net profit was 353.66 billion yen (or $US3.23 billion), down from a record 491.5 billion yen a year ago but higher than market estimates. Operating profit, which excludes earnings in China, fell 39% and more tellingly, revenue fell 4.7%. For the year ended March, 2009, Toyota maintained its forecasts for a net profit of 1.25 trillion yen and operating profit of 1.6 trillion yen, down almost 30% from the year to March, 2008, and the first fall since 2002. Toyota shares have dropped by around 25% in Tokyo, far less than the dramatic falls seen in the prices of General Motors and Ford. GM shares fell to their lowest level since 1954 in early July.   Meanwhile official rates rose in South Korea yesterday to the surprise of markets. The Bank of Korea raised its main rate by 0.25% to the highest in almost eight years, as it tries to slow inflation, and provide some support to a still weak currency. The bank lifted its seven-day repurchase rate to 5.25%. The country joins India, Indonesia, Taiwan, Thailand, Vietnam and the Philippines in boosting borrowing costs this year to try and control rapidly rising inflation. China has tried squeezing the lending ability of banks and hasn’t moved rates. China’s reserve asset ratio for banks is 17.5%, but there are signs of a relaxation happening with export rebates on textiles being lifted in recent days. South Korean consumer prices rose 5.9% in July from a year earlier. That rate was above the central bank’s target of 2.5% - 3.5% for a ninth successive month. The economy grew 4.8% last quarter, the weakest pace since the first three months of 2007. Not helping has been political instability around the administration of President Lee Myung Bak who has been forced to rein in his strong pro-growth policies to try and control inflation and the currency. Protests from the public over US beef imports and the rapid rising cost of living and other issues have not gone well for the President. His popularity has slumped. His unpopularity, the fear of political uncertainty, and the high inflation have helped produce an 8% drop in the value of Korea’s won against the US dollar this year. That has added to the cost of imports of food and energy, two of the big drivers of inflation.

Australia stock market news

Market Roundup 08/08/08

The market is down 25 (down 72 at worst) following the Dow wiping-off nearly an entire week of gains. Seems the credit crisis is not over after all. Financials underperforming – down 1.3% following the 5% drop in the US financial sector. Resources down 0.4% after significant 3% falls in BHP and RIO in the US last night. Most of the big industrials struggling – down 0.8%. SFE Futures down 58. 

Dow down 225. Down all session – 239 at worst. AIG posts massive loss, Citigroup caves in to fraud allegations and announce they’ll buyback debt securities sold to the public, jobless claims way up, Wal-Mart sales poor and outlook soft, and crude jumped. 

All 10 industry groups down. Indices still shaping up for a gain this week post the 331 point rise on Wednesday. Financials down 5% - AIG fell 18% (largest one-day decline ever) on a $5.4bn 2Q loss – posted $0.51c per share short of the expected profit of $0.63. Pandora’s Box opens – Citigroup has agreed to buy back $7.5bn of auction-rate debt securities from 40,000 retail clients and pay a $100m fine for misleading investors about the risk. After hours the Bank of America has received subpoenas and requests for information about its auction rate securities – could follow the way of Citigroup – other banks being investigated too. Citigroup down 6.24%, Merrill Lynch down 8.42%, BoA down 5.77%. S&P500 retailing Index down 2.1% - July numbers of 21 of the 31 retailers posted same-store-sales short of consensus. Wal-Mart said outlook is soft. Techs down 0.1% - outperformed relatively – semiconductors up 2.3%. Intel up 3.8% positive comments from Citigroup. Crude prices up 1.2% - broke the 3-day dive of $5.00. Resources down 0.3%.

CNBC adjectives of the Day - “Nosedive” – “Reality check” - “Sell the rallies”

• Both BHP and RIO down in ADR form overnight, 2.98% and 3.16% respectively. BHP and RIO dragging on the market, down 0.9% and 1.3%.
• Metals mostly up – Nickel the big mover up 6%, Lead up 3.29% and Copper up 0.55%. Zinc down 1.14%. Oz Minerals up 2.3%. Panoramic Resources up 8.4%, Minara up 7.1%.
• Oil price up $1.27 to $119.84 after Kurdish rebels claimed responsibility for a fire at key Turkish pipeline that supplies Western countries. Woodside up 2%.
• Gold down $5 to $873.80. Newcrest up 0.3%.
• US Bonds up with the 10 year yield down to 3.93% from 4.05%.

Iron ore stocks underperforming the resources as China’s trade surplus narrows by 17% YonY and posts its 4th monthly consecutive fall as their economic growth drops down a gear – FMG down 2.2%, PMM down 1.0% and MMX down 1.4%.

WESTPAC TRADING UPDATE(WBC) – Well received - Main point is that there is no need for an ANZ or NAB style profit warning – they say they are not at risk “from the types of significant write-down in securities portfolios that have impacted some other financial institutions“. FY08 cash earnings growth on track for 6-8% growth on-year – revenue forecast to rise by 8-9% and expense growth of 6-7%. Lending growth has slowed but housing growth has been strong. WBC expects margins to be stable. Provisions expected to be at similar levels to 1H08 - don’t expect significant writedowns. WBC outperforming its peers – up 1.4%. Three other big banks down – CBA down 0.8%, ANZ down 3.0% and the NAB down 2.5% taking the ASX200 index down 12 points on their own.

Property Trusts underperforming all sectors– down 2.1% on news that even LPTs that haven’t had profit warnings like Westfield (results on the 29^th) face an evaporating credit market and may have to sell assets rather than raise capital through the market. WDC down 2.5%.

Apart from that not a lot of news:

Newcrest (NCM) have announced they have increased their 30% stake in the PNG Gold Morobe JV to 50%. NCM up 4c to 2525c despite the $5 fall in the gold price overnight.

Boral (BLD) and Adelaide Brighton (ABC) are rumoured buyers of Cemex Australia’s concrete pipes and products assets. BLD up 3.1% and ABC down 2.3%.

UBS say Constellation Brands are unlikely to bid for Foster’s (FGL) wine business. FGL down 2.0%.

Tabcorp (TAH) down 2.1% after yesterday’s better-than-expected results and today’s broker research – there was some relief they weren’t a disaster with one broker saying they did well to meet guidance.

Connect East (CEU) up 1c to 86 after a big fall on their disappointing Eastlink traffic numbers yesterday. Rumour has it broker analysts are ripping up and down the link as we speak to justify their BUY recommendations.  Goldman Sachs JB Were cut to HOLD this morning.

CSR up 3.98% today as Goldman Sachs JB Were ups their recommendation on the stock from HOLD to BUY with a 271c target price. Now 236c. They have also upgraded their Boral recommendation to BUY from HOLD and the stock is up 3.14%. 688c target price. Now 592c.

Monadelphous Group’s(MND) results on August 19. UBS Warburg cut their target price to NEUTRAL from BUY due to recent share price appreciation, up nearly 20% in the past 6 weeks.

MQG – Macquarie Group– Credit Suisse cut their target price to 6500c from 6800c but maintain their OUTPERFORM recommendation after MQG released their specialist fund quarterly report for the 1Q. Total assets under management fell 3% over the past quarter to $225.4bn.

Goldman’s analyst comments on Vale’s (Brazil) market update – Vale enthusiastic about long-term iron-ore pellet demand for steel production. Comment that stainless steel producers have been unwilling to restock nickel inventories in the face of a deteriorating economic backdrop. Copper and coking coal are its favoured commodities for future growth.