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RBA: We will Cut Rates Soon
Aug 13, 2008
In their policy statement released last week, the central bank of Australia all but guaranteed a rate cut before the year ends.
Today, they have made it a guarantee.
In a statement before Australian lawmakers, RBA Deputy Governor stated "We cannot wait to see a fall in inflation before we start cutting rates".
The AUD has been hit hard in recent weeks, falling 13 of the past 14 trading sessions and each of the past 7 days.
Like Europe, Australia has seen a sharp reduction in retail sales. While inflation remains considerably high at 4.4%, an interest rate of 7,.25% leaves them room to cut in an inflationary environment.
Helping the RBA's case, the latest Inflation Expectations report drop considerably from 5.9% to 4.9%.
Futures markets are now pricing in a 50bps rate cut in their Sept 2nd policy meeting.
interest rates, AUD, RBA, rate cut, comments
Early Morning FX Data Recap
Aug 12, 2008
GBP
Today' trade balance and CPI data came in worse than expected.
CPI jumped to 4.4% vs expectations for a more modest rise to 4.1%. Even worse, core CPI (which excludes food, energy, and tobacco) rose unexpectedly 1.9% vs expectations of 1.7%.
This inflation data handcuffs the Bank of England, as they are unlikely to cut rates from 5.0% while inflation continues to rise.
OTOH, the UK economy is going to be in bad shape when they finally do cut rates. More evidence for this came in today's trade balance. The June trade balance came in at -£4.414 billion vs expectations for a total deficit of -£4.200 billion.
The GBPUSD tested 1.8970 twice overnight, recovering each time.
EUR
All signs point down for the Euro.
In perhaps the most important news, ECB member Bini Smaghi and Axel Weber indicated that Q2 GDP will be bad for the Euro-zone and Germany.
Mr. Weber indicated that the German economy is expected to experience a "dry spell" in the coming months, while avoiding a recession. His comments also downgraded German GDP expectations to 2% for 2008 and 1% for 2009. Previous projection placed 2008 GDP at 2.3% and 2009 GDP at 1.4%.
Mr. Smaghi warned the Euro-zone will "may have a phase of protracted weakness" in the next few quarters. However, he was quick to tow the party line, stressing it is "important to understand that in this phase inflation is the enemy of growth"
Their you have it, GDP should deteriorate in the Euro-zone and Germany, but the ECG remains focused on inflation and is thus unlikely to cut or raise rates.
The EURUSD is off morning lows but remains below 1.4900.
USD
The US trade balance unexpected narrowed in June to $56.8 billion. This significantly beat market expectations for a rise in the trade gap to $61.5 billion.
Additionally, May was revised lower from $59.7 billion to $59.2 billion.
CPI, trade balance, EUR, comments, GBP, USD
Quotes to Note
Jul 8, 2008
Some days we need to listen to comments rather than read reports.
In Europe, ECB vice president Lucas Papademos, who received a PHD in economics at MIT 1 year before Fed Chairman Bernanke, struck a balanced tone between on inflation and growth. "We are witnessing a period of rising inflationary pressure, moderating growth and continued tensions in the financial markets."
Mr. Papademos comments were echoed by German and Belgian Finance Ministers.
German Finance Minister Peer Steinbrueck stated "It (inflation) will have a negative impact on domestic demand and therefore also on the economy...(but) The economic clouding in Germany and in many other countries will obviously result in a certain counter effect to inflation."
Belgian Finance Minister Didier Reynders stated "We are more focused on the next weeks and months....to pay attention also to growth and not only to inflation"
Europe may have turned a corner, as these comments suggest they are now trying to balance inflation AND growth concerns.
French Finance Minister Christine Lagarde, who for the past few months has chided Trichet and the ECB for their singular inflation focus, must be pleased.
Meanwhile, back in the states, Richmond Fed President Jeffrey Lacker struck a particularly hawkish tone. Speaking at the National Economic Club, he made a number of key statements.
"It could happen that we find it necessary to raise rates even if unemployment is still rising and growth is weak...It's something we need to be prepared to do."
"While the risk of an acute near-term downturn has not entirely disappeared, it has diminished substantially"
And perhaps most importantly, Mr. Lacker noted that the personal consumption indicator (PCE) was running at 3.9% over the last 3 months and that "for several years I have suggested an inflation target of 1.5 percent"
Sounds like Mr. Lacker will be voting for a rate hike sometime this fall.
On the flip side of that coin though, Fed Chairman Ben Bernanke indicated that the central bank may keep the emergency lending facility open through the year.
Would the Fed really raise rates (and thus extend an economic slow down) if they are lending money to investment banks? While that is unlikely, rate changes usually take 6 - 9 months to take full effect. And, as evidenced by Mr. Lacker's comments, a stronger dollar may reduce import prices and thus help economic growth.
inflation, finance minsiter, Lacker, comments, Papademos
