Commonwealth Bank of Australia, the country’s largest home lender, says it is unable to guarantee matching any further reduction in official interest rates.

Financial markets are fully pricing a further quarter of a percentage point reduction in the Reserve Bank of Australia’s (RBA’s) cash rate when its board meets next month.

“We can’t be in a position to make any comment,” Commonwealth Bank of Australia’s James Sheffield told a parliamentary hearing in Canberra.

“The volatility in the market is huge at the moment,” he told parliament’s house economics committee which is conducting and inquiry of competition in the banking and non-banking sectors.

“You have got to wait for the theoreticals to become real and make a decision, balance out the interests of our customers, obviously pass on as much to our customers as we can afford, but you must also bear in mind we are on very turbulent waters at the moment.”

Retail banks did match the RBA’s rate cut earlier this month, the first reduction by the central bank in nearly seven years.

The Reserve Bank has moved to try and solve a shortage of US dollars in the Asian area by joining a swap arrangement involving the US Federal Reserve.

The shortgage of US dollars outside the US has continued despite moves by the Fed to inject more into the global economy.

The RBA has joined central banks from Norway, Sweden and Denmark in setting up a US dollar swap arrangement with the Fed totalling $US30 billion and lasting until at least the end of January 2009.

The RBA said currency swap lines have been set up between itself, the Fed and the Denmark, Norway and Sweden central banks - Danmarks Nationalbank, Norges Bank and Sveriges Riksbank.

“The swap serves to alleviate a shortage of US dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone,” the RBA said.

That’s part of a global shortage which saw short term rates in Europe for US dollar loans soar overnight to their highest levels since January.

At the same time, rates on US Government three month T-notes again fell sharply as banks and othert investors chased security while the $US700 billion bailout plan was being debated in Washington. 

The rates are not as low as they were a week ago when markets frayedf, but they are heading that way, indicating a sharp contraction in the availability of US dollars.

Hence the series of US dollar swaps the Fed has conducted in the past week with central banks around the world.

The US dollars will be made available, against collateral, to local market participants by the RBA through an auction, the first of which will happen tomorrow.

The term of the initial swap will be 28 days.

Subsequent auctions will depend on market conditions.

The RBA did a $1 billion US dollar swap last Thursday to try and pump extra American dollars into the market to accommodate demand from fund managers and others looking for greenbacks for end of quarter transactions.

“These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets,” the RBA said in a statement that was released simultaneously with a similar notice from the Fed.

“Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.”

The Fed said in its statement that the swap lines it will have with the RBA, Denmark Norway and Sweden central banks are a $US30 billion addition to the $US247 billion previously authorised temporary swap arrangements with other central banks announce earlier this month.

“In sum, these new facilities represent a $30 billion addition to the $247 billion previously authorized temporary reciprocal currency arrangements with other central banks: European Central Bank ($110 billion), Bank of Japan ($60 billion), Bank of England ($40 billion), Swiss National Bank ($27 billion), and Bank of Canada ($10 billion),” the Fed said in its announcement.

In a separate announcement the RBA said that it will establish a domestic term deposit facility to further enhance the flexibility of domestic liquidity management operations.

“To further enhance the flexibility of its domestic liquidity management operations, the Reserve Bank will offer a short-term deposit facility (to be known as RBA Term Deposits),” it said.

The facility will be available to institutions holding an exchange settlement account and to authorised deposit-taking institutions.

The RBA will conduct auctions at which eligible institutions will be able to bid for deposits.

The first of auction, for a deposit of 14 days, will be held next Monday, September 29.

It will be run in addition to the current system of injecting funds each morning via repurchase deals involving government bonds and other securities as well as asset backed commercial paper and residential backed mortgages.

The offer to take short-term deposits from banks and financial institutions is going to be aimed at mopping up liquidity from banks, as part of its domestic operations.

Analysts said the bank is trying to attract some of the excess overnight funds that banks are holding as they refrain from lending to each other at the moment because of the credit crunch.

That has led to a spike in term-money rates, especially in three month bill rates. They are above the rates for 180 day paper: 7.43% versus 7.34%. This has been happening since the start of the month

The RBA yesterday $815 million in repurchase agreements, compared to an estimated cash deficit of $612 million. It drained a small amount on Tuesday, but resumed pumping in extra cash on yesterday as interbank lending rates remained high.

• RBA warns inflation won’t start falling for another six months
• Interest rates were cut last week for first time in seven years
• In-depth: The latest interest rates news and features
• THE Reserve Bank of Australia (RBA) governor Glenn Stevens says the central bank did not get it wrong when it hiked interest rates earlier this year, rejecting claims it went too far in its fight against inflation.

  Mr Stevens said the RBA board’s credentials would have been in questionable if it had not acted when all the evidence at the time was pointing to inflation rising.

  “I don’t think the board had got it wrong,” he told a House of Representatives Economics Committee hearing today in Melbourne in response to a question.

  “I doubt very much we could have credibly just sat there with what inflation was doing.”

  “On the information we had then on the assessment on the risks that we could make then and even looking back those moves were correct.”

  The central bank last hiked interest rates in March, after an earlier rise in February.

  Last week, it cut official rates for the first time in almost seven years, to 7 per cent to 7.25 per cent.
  Mr Stevens also when the RBA decided to cut rates this month, it had done so with a view that the central bank took a forward view.

   

  “At the September meeting the board took a step in that direction,” he said.

  “The logic of this decision was the same as the one that, some years earlier, had led the board to begin raising rates from unusually low levels: the setting of policy designed to get the economy to change course probably will not be the right one once the change of course has occurred, and it will need to be adjusted.

  “A further consideration was that conditions recently had actually tightened marginally as a result of rises in lenders interest rates, which from a macroeconomic point of view was not needed.”

  Mr Stevens said Australia is probably six months away from seeing clear data evidence that inflation has begun to fall.

  “Admittedly, we are probably six months away from seeing clear evidence that inflation has begun to fall, and even then it has to fall quite some distance before it is back to rates consistent with achieving 2 to 3 per cent on average,” he said in his opening remarks to the committee.

  Mr Stevens declined to comment on the prospect for further rate cuts, saying the situation would be assessed on a month by month basis.

  But he noted that financial markets are pricing in the possibility for more decreases, and that key market rates had already been falling.

  But this time around in the economic cycle a “somewhat larger fall” in inflation overall was required than was the case in either 2001 or 1995.

  “Rather than trying to achieve that larger fall in inflation by pushing it down more quickly, the board’s strategy is to seek a gradual fall, but over a longer period,” he said.

  “This carries less risk of a sharp slump in economic activity, though it does require a longer period of restraint on demand.

  “On the other hand, this carries the risk that a long period of high inflation could lead to expectations of inflation rising to the point where it becomes both more difficult and more costly to reduce it.”

  Mr Stevens said monetary policy has to balance all these risks, which is why the bank’s flexible, medium-term inflation targeting system was so important.

  “That framework will continue to guide the board’s decision making,” he said.

  Mr Stevens reiterated the bank’s view that a picture of moderating demand, at least for households, is continuing to emerge, particularly amid the current tight financial conditions.

  “Overall, households are at present much more cautious about spending and borrowing, after a number of years in which confidence levels were very high and there had been strong rates of growth in borrowing and spending,” he said.

  Mr Stevens said confidence in international credit markets had continued to wax and wane but overall the Australian financial system is weathering the storm.

  “What we see in the Australian financial scene is an order of magnitude less troubling than what we see abroad,” Mr Stevens said.

  “The balance sheets of the bulk of corporate Australia are not over-geared.”

  As well, Australian financial institutions continue to have adequate access to off shore financing, relative to their peers in the US, Europe and the UK, albeit at higher prices than a year ago.

  “Some have had to make provisions for unwise exposures that had been accumulated earlier,” he said.

  “But even in these cases, capital, asset quality and profitability remain very sound.”

  “In summary, the Australian financial system is weathering the storm well.”

It’s nice to be able to report on some good news: The commodity boom is still happening, and we are now seeing the first real signs that the boom is transforming our trade performance. Figures for the June quarter showed the first real tangible fruits of the resources boom in producing a $7 billion improvement in our trade performance and cutting the overall current account deficit for the quarter to its lower level for three years. Powered principally by the 86% rise in iron ore export prices and a doubling in the value of thermal coal exports and a 200%-plus rise in the value of coking coal contracts with steel mills around the world, the current account deficit was the best since the June quarter of 2007. Economists said it was the largest single biggest improvement in the current account deficit in the history of the data since 1959. Export values increased by around 13.6%, while imports were up only 0.5% in the quarter, so our terms of trade improved by just over 13% (which again is the point the RBA has been making about the rise in national income expected this year). The news won’t influence the Reserve Bank’s decision to cut interest rates today by at least 0.25%.  The improvement is what the Reserve Bank has been cautioning us about the surge of income expected from the improvement in our terms of trade this year. The solid trade performance and associated rise in corporate profits (the boost coming from resources) could see the RBA cut today and then sit for a month or three. Another sharp fall in world oil prices overnight to around $US111 million after Hurricane Gustav missed New Orleans, might also encourage a cut and hold strategy. The latest ABS figures could very well be adjusted further as more information comes to light. There have already been significant positive revisions in the monthly figures from the Australian Bureau of Statistics. The figures on trade, as well as inventories, profits, wages and salaries and sales do not show an economy that collapsed in the June quarter, but the pace of activity did slow. Figures released yesterday from the ABS show that the current account deficit, seasonally adjusted, fell $7.068 billion or a huge 36% to $12.774 billion in the June quarter. That was around $1 billion above some estimates, but that could be easily changed by future revisions. More stunning was the improvement in the trade account: the ABS reported that surplus (not the usual deficit!) on balance of goods and services of $559 million was a turnaround of $7,872 million on the $7,313 million deficit of the March quarter 2008. That was the first trade surplus since the March quarter of 2002. It was the largest current account surplus since the big $2.2 billion back in the June quarter of 1997. The income deficit increased 6% or $797 million to a still too large $13.284 billion. Our net foreign debt fell 1% to $599.935 billion, thanks mostly to the valuation effect from the strong Australian dollar. That will probably be the low point for a while, given the slump in the dollar since then. It traded around 85.48 US cents this morning, having lost around 8.5% in August against the greenback.

The ABS estimated that the dramatic improvement in our trade performance would detract 0.1% from the Gross Domestic Product numbers when released on Wednesday.

That in itself is also a significant improvement as the poor trade performance in the March quarter chopped 0.7% from growth in the quarter. 

That is a little less than the 0.2% positive contribution estimated from the markets, but economists say that the ABS figure is only an early estimate.

March GDP grew 0.6% for an annual rate of 3.6%. The latest news means that growth may be a bit higher than thought by some: perhaps around 0.3% to 0.4%, which would bring the annual rate down to around 2.8%.

But complicating matters were solid figures for business inventories, up 0.3% in the quarter in seasonally adjusted and wages and salaries, up 2.3%, while company profits (or the gross operating surplus) rose sharply off the back of the resources boom especially BHP Billiton and Rio Tinto.

Australian businesses posted their largest increase in annual profit growth for almost seven years as the mining boom ripples through the economy.

Company gross operating profits, seasonally adjusted, rose 21.5% in the year to June. It was the biggest percentage rise since December 2001.

Profits rose by 14.3%, seasonally adjusted, for the June quarter, more than five times the market forecast of 2.8%. This was the largest quarterly growth in company profits since March 2001.

But this won’t translate into a big boost for growth in tomorrow’s GDP numbers as the ABS will apply a deflator to reduce that figure to eliminate the impact of inflation.

Sales of goods and services were estimated to have risen 0.4% in seasonally adjusted terms for manufacturing and 1.1% for wholesale.

That there was no sharp rise in inventories could mean that retailers managed not to be caught long unsold stocks by the retailing slump from February-March onwards.

And there was some relatively good news on inflation with the TD Securities/Melbourne Institute Monthly inflation gauge showing a slowing in the rate of price growth to just 0.1% in August from 0.4% in July: the annual rate was still a high 4.2%.

The August figure was a 15 month low because of the fall in petrol prices. Without petrol prices the rise would have been 0.6%, but without petrol prices the rate of increase up to August would have been very much lower than the 4.8% the gauge peaked at.

Rising food, home fuel costs and insurance held the annual inflation reading at 4.2% for the year to August, down from 4.6 last month.

And we saw a small contraction in manufacturing in August for a third month.

The performance of manufacturing index rose 0.1 points to 47 from July, when it fell 0.1 points, PricewaterhouseCoopers and the Australian Industry Group said in a report released in Canberra.

The index was below 50 for a third month, signaling manufacturing is shrinking.

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.

It looks as though the Reserve Bank of Australia (RBA) is at it again. By now you should be familiar with them deciding that fuel and food can be discounted from the CPI rate due to the volatility of those items – and the fact that they have been among the largest risers – but now they have thrown another item into the mix.

Yesterday the RBA released the minutes from its August 5th meeting – too late for us to deliver it to you in yesterday’s Money Morning – leaving the market with the unequivocal impression that interest rates would be cut at the September meeting.

The minutes told us that “the high quarterly outcome of 1.5 per cent had lifted the year-ended inflation rate to 4.5 per cent. A significant contribution to the CPI had come from the financial services component, which accounted for around 8 per cent of the CPI.”

So, there you have it, inflation has kicked up to 4.5%. So what is the RBA going to do about it? All was revealed in the next paragraph of the minutes: “Using an internationally comparable definition of core inflation supply excluding food, energy and financial services, the pick-up in Australia’s inflation rate was less pronounced than the CPI suggested.”

It’s bound to be “less pronounced” if you strip out three of the major factors affecting the CPI. Anyway, the RBA has managed to convince the market that the inflation threat is under control, and that interest rates will be slashed in September.

We look forward to the next release of CPI data in October to see if anything else will be “excluded.”

The Biggest Losers
If you take a look at the “Five Biggest Losers” and the “52-Week Lows” over to the right it has the fatal appearance of the impending death of a species of financial product. We mentioned yesterday how Babcock & Brown [ASX:BNB] was looking a bit yellow around the gills, today it has turned green and its funds don’t look too far off a state of rigor mortis.

Management have at least taken the one sure fire step to avoid a further fall in the BNB share price, they have requested a trading halt of the company’s shares. It’s unclear when the trading halt will be lifted, however it has advised that a board meeting will be held tomorrow to discuss “corporate governance issues… and management changes.” Not exactly a ringing endorsement of the current management team.

CEO Phil Green should probably remember to take a cardboard box with him when he goes into the office on Thursday.

Yes Cardno
It isn’t quite on the same scale as BHP Billiton’s $18 billion annual profit, but engineering company Cardno [ASX:CDD] released an excellent full year report themselves. The company specializes in civil, structural and environmental engineering.

In some ways the results were more interesting, it increased revenues by 50% to $399 million, and net profit by 48% to $27 million.

The company doesn’t even claim to have a large direct exposure to the resources and mining industry either. Although their exposure to coastal, marine and environment industries does necessarily create an indirect link.

ASI
On the subject of small cap companies, Gabriel is crunching the numbers and studying the charts this morning for us. So tomorrow we should be looking at a small cap stock chart that makes interesting reading.

Midday Market Roundup 13/08/08
August 13 2008 - Australasian Investment Review – (AIR)

The market is down 110 – a fair bit worse than the 33 point fall predicted by the futures this morning. Resources down 2.2% despite BHP being up in the US. Financials flogged following the 5.2% fall in the US financials index overnight.

Dow down 139. Down all session – down 180 at worst. Resources up. Gold down heavily again. Financials worst performing sector by far - down 5.2% - Morgan Stanley buys back $4.5bn in auction-rate-securities, UBS posted 4^th-straight Qrly loss, Wachovia reported bigger-than-expected 2Q loss, JP Morgan announced a loss of $1.5bn, and Goldmans earnings estimates were cut by Oppenheimer. The Tradedeficit narrowed more-than-expected, the Budget deficit blew out to $102.8bn (triple last year’s number), retail sales growth slowed and consumer confidence remained at all-time lows. Sub-prime losses topped $500bn for the first time.

• Both BHP and RIO up in ADR form overnight, 0.69% and 0.92% respectively. BHP down 85c to 3636c. RIO down 347c to 11050c.
• Metals mostly down overnight – Zinc down 4.4%, Copper down 3.28% and Aluminium down 2.2%. Nickel up 0.75%. Oz Minerals down 7c to 166c.
• Oil price down $1.34 to $113.10 – hit a 14 month low down 23% from its record but still up 58% from last year. Woodside down 47c to 5147c.
• Gold down $13.50 to $810.80 – it was the eighth straight fall, the longest streak since 2001. Somehow Newcrest has managed to go up 61c to 2410c.
• US Bonds up with the 10 year yield down to 3.91% from 4%.

Main stories

CBA RESULTS OK BUT NOT GREAT- down 1.8% - results described as “solid” and broadly in-line with no nasty surprises - posted full year net profit up 7% to $4.79bn. Cautious outlook for FY09. All-important cash profit up 5% to $4.733bn on strong business lending and robust fund management business - was slightly above the consensus of $4.729bn. Operating income up 10% with some impressive statistics around new deposits and gains in market share. Final dividend at $1.53 compared to the expected $1.55. Higher-than-expected loan impairment charges jumping to $930m from $434m last year – bit above broker’s forecasts, but are low compared to peers and doesn’t seemed to have upset anyone.

TESLTRA RESULTS A BIT FLAT - down 3.1%– net profit slightly below expectations posting $3.69bn compared to consensus of $3.78bn. EBIT up 7.7% against company guidance of 6-8%. Dividend remains 14c as expected. Guidance bit below expectations with FY09 revenue growth forecast at 3-4% and EBIT growth of 6-7% compared to analyst’s 8.5% forecast rise in EBIT.

Other

IRONORESECTOR DOWN - FMG down 4.5%. Iron ore stocks being punished – PMM down 1.2%, MGX down 5.9% and MMX down 11.7%.

GOLDS SURPRISINGLY HIGHER- Major gold stocks up despite the gold price fall – NCM and LGL up 4.3% and 3.8%.

Australian consumer sentiment bounces in August up 9.1% from July – index at seasonally adjusted 86.2 from 79.0 – reflects lower fuel prices, talk of interest rate cuts and delivery of tax cuts. Good sign for consumer stocks.

RBA clashing with the view of Australia’s major bank CEOs about dropping interest rates despite rising funding costs – RBA says the banks have no case to delay cuts if rates fall – another sign for an imminent September cut. One broker predicting 5 cuts between now and the end of 2009.

Computershare (CPU) down 8.41% on results - Full year net profit was up 21% to $282m from $233.8m a year ago - below the $324.9m expected. Dividend 11c up from 9c a year ago. Earnigns guidance for 2009 was +10%, ahead of some expectations. CPU also to buy ABC Learning’s UK childcare voucher business for GBP90m.

Goodman Fielder (GFF) down 2% on a disappointing trading update including a write down of $170m on its dairy products division. EBIT declined from $70m in FY06 to $50.5m in FY07. Guidance on ‘normalised’ net profit for the year remains the same if you ignore the write-down. Dividend unchanged at 13.5c.

Equinox Minerals (EQN) down 3.62% on results (a loss) – the 1H loss was less than the circa $18.2m expected due to lower exploration and admin costs expensed. Has sufficient funds to complete the Lumwana project.

CSL Ltd (CSL) in a trading halt pending the release of an announcement about a $1.5bn institutional share placement to raise cash for a $3.5bn acquisition of Talecris Biotherapeutics. .

HastingsDiversified (HDF) down 2.64% as Epic Energy enters into a gas transportation agreement with Adelaide Brighton forecast to earn $42m in revenues over 10 years.

The RBA Tells You What You Already Know

The Reserve Bank released its Statement on Monetary Policy for August yesterday, reader. It took 25,254 words, 76 graphs and 17 tables for our monetary authority to tell you everything you already know about Australia’s economy and financial markets.

Only 28 of those words meant anything to anyone.

“On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing.”

It all boils down to that. The RBA only really needed three words: “interest rate cut”. That would’ve done it.

The rest of the publication is a recap.

Fuel costs are high. Asset prices are falling. Economic growth is slowing everywhere. Inflation is high. The credit crunch isn’t over. Business conditions are deteriorating. Retail spending is falling.

So it looks as though we’ll be getting an interest rate cut. Money markets and analysts are taking it as a given now.

Then again, central bankers have resorted to threats and games before. We guess we’ll find out in a month.

But there was one optimistic point from the RBA’s letter. Australia’s terms of trade are increasing, thanks to coal and iron prices. Buy the ‘Out Economy’, we say.

Another Chance to Buy the ‘Out Economy’…at a 34% Discount

How can you do that? Well, here’s a thought. Iron companies have lost chunks of market value in the last two months.

Fortescue’s (ASX:FMG) down 34% from its high.

Murchison’s (ASX:MMX) off 43%.

Mount Gibson’s (ASX:MGX) 41% lower.

They could go lower.

But the iron business is still a gold rush in its own right, whatever the share prices are doing. Fortescue announced yesterday that plans to double its iron production are ahead of schedule. We asked Gabriel what he thought of the stock. He was pretty keen. Scroll down for the full story.

Meanwhile, fellow iron ore producer Mount Gibson announced a record net profit of AU$113 million. The market didn’t even glance up. The stock traded flat.

You buy when there’s blood in the streets. What about when there’s utter indifference in the streets? What about when the streets are flush with beige?

It’s uninspiring to see investors shun good results. It’s not like insiders anticipated this either. Mount Gibson has been trading lower for the last month. But markets change. It’s handy to get in before that happens.

A Correction in Bank Pain

The market isn’t entirely indifferent these days, though. It shrieks and leaps up on a chair every time another company confesses sub-prime blues.

But as we’ve said before, sub-prime losses aren’t the best measure of how Australian banks are travelling. It’s how much their funding costs rise.

And, as you can see from our Bank Pain Index to the right, funding costs are back to where they were this time last year.

Maybe it’s tempting to think that the credit whipping is over. Especially when Bendigo and Adelaide Bank (ASX:BEN) posts solid, 40% growth in annual profit.

Don’t be fooled though. This isn’t permanent. As we said above, money markets have factored in a rate cut. Probably a double-slash of about 50 basis points. That’s how the RBA usually kicks off the cutting party. It likes to loosen things up with a double-shot of financial liquidity.

But if the RBA makes its move and cuts…don’t expect money markets to follow the cash rate down any further. And that’ll leave banks with a big spread between the cash rate and their own funding costs. A big, nasty, expensive spread.

Or, the alternative…the RBA doesn’t cut rates and money markets skip back up to nosebleed highs. Someone hand ANZ a tissue.

Babcock, the Life of the Party

After looking at that Mount Gibson result, it seems like investors are bored with the share market, reader. And every time things get boring, Babcock and Brown (ASX:BNB) likes to step in and liven the place up a little. Like the attention-seeking guy at a party who loves to make a spectacle. Usually at his own expense.

Right on cue…Babcock’s tipping next half’s profit will be down 40%.

Investors’ lives suddenly became instantly interesting. They had purpose. They had a mission. Their mission was to sell the stock down 12% for the day.

Credit crunch? Not over.

Money Weekend editor Kris Sayce has been all over this story. Babcock’s paying for establishing a high-debt business model that doesn’t work when the cost of debt goes up. And the money markets continue to flog companies like Babcock into submission. It’s not over.

Gold Cheapens to US$828

Meanwhile, gold took a big fall last night reader. It’s gone all the way down below US$830. Gabriel’s trying to figure out whether traders will support it from here, reader. He’ll let you know tomorrow.

Remember…gold’s one of the best ways to sell the financial crisis. This is just a correction. And in a financial crisis this huge, there’s more to come. Watch for gold to move up again later this year.

What Happens to Shares When Central Bankers Change their Tune

Some people look at the RBA and see a puppet-master, pulling strings to keep the economy dancing a merry tune. We look at it and see an irrelevancy.

Our own opinions aside…if the RBA starts cutting rates, it should mean joy for the share market. All other things equal, of course.

The last cash rate tops haven’t necessarily coincided with a booming All Ordinaries, though. In December 1994, the rate topped out at 7.5%. The index went straight up. But it’s the only textbook example of rate tops meaning market bottoms. In the early 1990s we had a recession despite falling rates. And after the top in August 2000 the market traded sideways for month.

This time could be different, of course. And if history sets it apart from the other examples, it’ll probably be because of a continued drop in the oil price.

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.

Attention for investors here will be on the market financials like the banks, June 30 companies reporting and the Reserve Bank board meeting tomorrow, but we should also not take our eye off the US Federal Reserve’s interest rate decision early Wednesday morning, our time. There are also corporate reports in the US, Europe and Britain that could influence markets, while some important statistics will also be released and could influence markets, especially our jobs numbers for July on Thursday. All in all it will be another week of volatility for investors to contend with.It was a year ago this Tuesday that the RBA lifted interest rates to 6.50%; that was the start of four increases that the credit crunch later turned into at least six, or 1.50% or more on mortgage and other rates. Here we have the Reserve Bank board meeting tomorrow: no change is expected. The Fed tomorrow night, our time and the Bank of England and the European Central Bank on Thursday night, our time. After the flood of poor economic news in Australia last week, there’s a small chance of a cut here, but not much. What will be interesting is whether there’s a change in its post meeting statement to signal that an easing is in the offing. The money market has already priced in a 20% chance of an RBA cash rate cut on Tuesday and a 90% probability of a move by October, with two cuts by next February. Australian statistics due for release include the June quarter and 2007-08 financial year house price index, and job ads today, housing finance and employment and unemployment figures for July on Thursday. Unemployment could show a small rise to partly reverse the surprise jump in the number of new jobs in June. The June full year and half year profit reporting season will also start to kick off with stocks such as AXA, Seven network, News Corp and West Australian News due to report. The AMP’s Dr Shane Oliver says his group expects overall profit growth for 2007-08 to come in pretty weak at around +3%, down from +15% in the previous financial year. “The economic back drop 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 over the next few weeks of the reporting season is likely to be on the outlook statements released by 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.” he wrote. After Friday’s shock earnings downgrade from insurer and bank, Suncorp Metway, anything is possible. Important results this week will include transport and infrastructure operator, Asciano. It’s been a constant mention as a possible victim of the credit crunch and had to abandon a stalking takeover attempt of Brambles at a big loss. Its shares have risen recently, so perhaps the company might be out of trouble. Its price has bounced from less than $3 a share to $4.15 close on Friday. The shares rose 71 cents alone last week! Media groups, News Corp, Seven Network and West Australian Newspapers all release final profit this week. Seven is stalking WAN and recently lifted its stake to over 22% in a major creep up the register. News Corp’s newspaper operations in the US and Britain will take a hit and some analysts believe its US Pay TV, film and TV business may also be hurt by indifferent performance and falling consumer spending in the recessed US economy. Tabcorp is another group of interest to report since the Victorian Government snatched its gaming licence post 2012 away from it. The company’s shares have been weak ever since and there has been talk of some corporate activity. In the US the focus will be on the Federal Reserve which is expected to leave interest rates on hold and highlight the offsetting upside risks to inflation and downside risks to growth.

The Fed last week added extra liquidity moves to help a still “fragile” financial system which will push its help out into January 2009.

Friday saw the 8th US bank to be seized and closed by regulators this year: it was only a tiddler with just over $US250 million in assets and based in Florida. 

But the news of the failure, coming on a Friday after trading ended, will worry investors again: it’s the third Friday in a row that a bank failure has been announced.

The key US regulator, the FDIC, warned four other small US banks Friday to either get new capital, stop lending in some areas, or to stop issuing credit cards. This can be a precursor to later problems as managements struggle to find new capital or income streams.

We will also get US data for pending home sales, personal spending and the Fed’s preferred measure of core inflation will also be released, while in London The Bank of England also meets to consider interest rates, as will the ECB.

Both central banks will most probably leave rates steady, although the Bank of England is under enormous pressure to ‘do something” to ease the economic pain and the slide towards recession.

Like here, the US and other major economies, rising inflation seems to be the least concern in Britain for most people these days, even with high petrol prices still cutting demand at retailers.

US corporates reporting this week and likely to influence the market are tech bellwether Cisco Systems, consumer products giant, Procter & Gamble and troubled insurer American International Group. All are due to report on Tuesday, US time.

US analysts say that even if the earnings reports are solid and bring some relief, US investors will be on edge as concerns about the impact of the credit crisis on the economy persist. 

That’s especially so after Friday’s report on Friday showed US unemployment rose to 5.7% in July, its highest rate in four years, as employers cut 51,000 non-farm payroll jobs.

That’s why the spotlight will fall on the Fed’s statement that will accompany its rate decision on interest rates early Wednesday morning, our time.

The poor jobs report, along with lower-than-expected second-quarter US economic growth figures, have helped cement views that the Fed will keep benchmark lending rates steady at 2% for several months.