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Big, bad budget week ahead

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by Peter Switzer

What a week ahead for investors with the fate of the stock market, our economy, interest rates, the level of the Aussie dollar and the level of unemployment all bound to be in sharper focus by Friday.

This could turn out to be a big, bad budget week or it could turn out to be a bloody, bottler budget week. It’s all in the numbers — those produced by the Treasurer on one hand but, probably more importantly, the numbers coming out of the Australian Bureau of Statistics, Wall Street and Europe’s team of deadbeat debtor countries, with Greece the latest to be in the spotlight.

This time last year, Greece and its fellow PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) spooked global financial markets. In concert with the fears, which were unwarranted, over a double-dip recession in the US, it brought shares down.

Positive jobs report

Over the weekend, ‘Greece could default‘ talk worried financial markets but thankfully the Yanks countered this negativity with a better-than-expected jobs report. In fact, the Dow rallied 175 points on the jobs report, which showed in April America had created three months in a row of more than 200,000, to remind doubters that the recovery continues.

And in a good sign, unemployment actually increased as more people were pounding the pavements now more confident that they might get a job. This rise in the participation rate is a positive omen as well.

Market over the weekend

For the record, the Dow ended up 54.6 points to 12,638.74 while the S&P 500 put on five points or 0.38 per cent to 1340.2.

By the way, the rise might have been more if the US dollar had not gone higher as commodity prices have fallen this week, with the oil price under US$100 a barrel and the Oz dollar now off its 110-US cents high at around 107 US cents.

These jobs figures come when US consumers are starting to look more confident and lower gasoline prices will help.

Over in Europe, the Greeks apparently talked to EU officials for help with their 327 billion euros debt disaster, which represents 160 per cent of GDP. This put a cat among the financial market pigeons but European officials assured markets that bondholders would not lose out, though some might be asked to convert shorter-term bonds for longer-dated equivalents. That still could affect balance sheets of European banks, which are big investors in these bonds.

Cautious week

For those looking for signs for the stock market, it was definitely a week for caution where on Wall Street healthcare stocks were up and consumer staples were flat but energy, materials and consumer discretionary were all down.

Also for the week, the Dow was down 1.34 per cent while the S&P 500 lost 1.72 per cent. That’s a sell week for the first week in May. I think we will see choppiness for a couple of months but my bias remains to the positive given the job numbers.

Soft budget or hard budget?

At home, I don’t expect the Treasurer to move the market but he could move the currency. If the budget is too soft, it could make markets predict an interest rate rise in June and that would push our dollar higher. This would be a double whammy to the economy as the high dollar is also putting a brake on many parts of the economy, just like an interest rate rise.

If the budget is too hard, it will actually take some pressure off the Reserve Bank to raise rates too soon and this could help the dollar slip to slightly lower levels.

That means the budget, which is expected to come in around $50 billion this financial year instead of the $41.5 billion forecasted in May last year, will be bigger than expected. This comes about because the economy is weaker than expected.

The Treasurer and everybody else had us growing at 3.25 per cent but we are growing a lot slower than that and we know who is to blame — the RBA and its excessive interest rate rise policy.

Aussie jobs report

That’s why this budget on Tuesday night has to be wisely constructed but even if Wayne Swan pulls a rabbit out of his hat, it could cop a rabbit chop on Thursday when the latest job numbers come out.

Each month employment needs to rise by around 20,000 to keep the jobless rate stable and CommSec is tipping a 25,000 increase in new jobs for April. If they’re right, the jobless rate will remain at 4.9 per cent or edge a touch lower to 4.8 per cent – depending on what the participation rate does.

A bigger-than-expected job creation result could undo any good work in the budget and the Reserve Bank could raise in June. However, a weaker number could make them think twice.

Worried about the present

The best outcome for Australia would be for interest rates to remain, at best, at these levels. The higher they go, the more they will choke business and consumer confidence, which do not appear to be important to the Central Bank’s board.

They are transfixed by the threat of billions of dollars of business investment in the so-called pipeline and the threat of piles of export income from China buying our iron ore and coal.

However, this is a potential future they are worried about but I’m worried about a pretty crappy present right here, right now.

One final thought. If the Yanks keep recovering and our interest rates don’t rise, then our dollar might peel off a bit and this could give scope to see our dollar-exposed companies earn better profits, which will help share prices locally catch up on the bigger rises seen in the US over the past year.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, May 09, 2011

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