Wednesday worries lie ahead
by Peter Switzer
Another Wednesday in the greatest country on earth but there are a few challenges we have to worry about.
First, the Yanks are still playing silly-billy politics with their debt, deficit and financial markets.
The Oz dollar has kicked off the day at 109.7 US cents and will go higher if the $US14 trillion debt/deficits problem is not resolved in the American Congress.
Meanwhile locally, interest rate rises or cuts will be in focus after the inflation figures are released this morning. Remember, the RBA meets next Tuesday and a small number could intensify rate cut talk but a big number will resurrect “rates will rise” headlines.
Right now the Republican-controlled House of Reps has a plan that the Democrats will reject in the Senate and the Democrat-controlled Senate has a plan that will be rejected in the House.
So, how spooked are US investors? Not very considering that a failure to agree could sink the US’s triple-A rating, force up interest rates, hurt the greenback, increase unemployment and probably drive the US back into recession!
Let’s look at the reaction on Wall Street. The Dow was down 91.5 points or 0.73 per cent overnight to 12,502 while the S&P 500 slipped 5.5 points to 1331.9. That’s not a big sell-off and means that most investors expect an eleventh-hour rescue, like in the movies.
That said, the VIX or fear index was up four per cent to over a reading of 20, so some players are getting toey.
I can’t believe the Yanks, no matter how dumb they have been in the past, could allow their debt rating to drop and their economy to slide into recession. That would be a big price for the Republicans teaching the Democrats a budget lesson, considering the fact that George Bush’s Republicans created most of this mess.
And to be frank, most economists with any brains supported the Obama rescue strategy anyway. Remember, the Yanks did avert a Great Depression where unemployment would have gone to 20 per cent and we would have seen a 10 per cent plus jobless rate here.
I am punting on good sense to prevail in America but I know I am not backing an odds-on favourite!
Locally, the key number for today’s inflation is 0.7 per cent for the underlying reading. Anything less than this would mean core inflation is under 2.5 per cent and that could make the RBA think about a rate cut, which would help business and consumer confidence.
On the Reserve Bank, I don’t think they will cut rates until they see a very low inflation number and/or some dramatic, scary financial event happening overseas. I know I want to see the former but I would hate to see the latter.
I hate guessing statistics, as it can be a lucky dip. Given how slow the economy is inflation should be heading down but who knows?
Keep your fingers crossed.
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Published on: Wednesday, July 27, 2011
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