August 2 deadline looms
by Peter Switzer
This is a HUGE week for financial markets and economies right around the world with their destinies to be determined by politicians on Capitol Hill in Washington.
The other is a local affair starring the Reserve Bank board as its board considers whether another interest rate rise is necessary.
The biggest market mover is the debt and deficit decisions and given what we saw over the weekend the Republicans are talking with a more conciliatory tone. But there is still a lot of horse-trading before this is all over.
August 2 is the deadline for Congress to pass a package on deficit reductions and the new debt ceiling, which will determine how much more the Obama Administration can borrow.
The decisions the key US politicians make will determine how Wall Street responds, how rating agencies will react and then how stock and other financial markets either slump or rally.
The past week saw Wall Street give up more than four per cent and our S&P/ASX 200 lost 3.7 per cent to hit a low not seen since August 31 2010.
This is serious stuff with Credit Suisse arguing that a failure to reach an agreement could mean a five per cent drop in American GDP, which would mean a massive spike in unemployment in an election year and a predicted 30 per cent crash in the stock market.
Democrat House leader, Nancy Pelosi put this bone stupidity coming out of the US Congress into sensible context saying it was “time to end this theatre of the absurd. It's time for us to get real”.
Associated Press reported over the weekend that “House Democrats said they would put aside their resistance to legislation that makes deep spending cuts and back the measure in a show of strength that could improve (Democrat Senate leader) Reid's leverage in negotiations.”
That’s good news, as I believe Obama is better off caving in for the sake of the US people, Wall Street and the international financial markets.
Obama wants the debt limit raised by $2.4 billion so he won’t have to have another of these before the election in late 2012. But the Republicans have been fighting against the request, obviously believing that another of these debt dramas will help their election plans.
Locally, the RBA board decides on Tuesday what will happen to interest rates. Some Rambo types want a rate rise on Tuesday while most economists think rates will eventually rise but a wait-and-watch-the-economy attitude prevails with most number crunchers. That’s sensible.
However, Bill Evans, Westpac’s chief economist is sticking to his big call that the next rate move should be down. He sees four rate cuts ahead but he is a lone voice within the economics fraternity.
With some market analysts saying that the US debt debacle could lead to financial Armageddon, it hardly makes sense for the RBA to raise rates this week. Just about every economic reading apart from employment is screaming out that most of the economy is soft and I believe unemployment will start rising over the rest of this year. If it doesn’t it will only be because the jobs created in the mining and infrastructure/construction side of the economy will offset the near-recession-like experience we are seeing in areas such as retail, tourism and manufacturing.
We get the latest reading on the country’s economic growth on September 7, which is after the next RBA meeting and so I would say it would be smart to wait until October before any change in interest rates is necessary.
I only hope the RBA board sees it that way. I know the Gillard Government would be praying that they don’t have to deal with another negative, such as a rate hike, as they live through a political life that could be captured in a book entitled How to Lose Friends and Totally Cheese People Off.
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Published on: Monday, August 01, 2011
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