Federal budget at the centre of credit rating concern

Australia:  

Standard & Poor's Ratings Services has backed warnings by Australia's central bank that the federal budget would be vulnerable to a global economic shock, which could put the country's AAA rating at risk.  

Considering Australia's relatively low government debt, at 20% of GDP, S&P analyst Craig Michaels said there is no immediate threat to its AAA rating.  

Michaels said he expects government debt to rise above 20% of GDP in coming years, but said the rating would only come under direct pressure if debt moved closer to 30% of GDP.

Share Markets:

US share markets fluctuated for much of the session, as investors assessed the mixed US economic data and speculated that Greece and its creditors will reach a bailout agreement.

At the close, the Dow Jones was 0.3% lower and the S&P 500 index was 0.1% lower.

Interest Rates: 

US 10-year treasury yields rose from 2.04% to 2.10% where they currently lie.

The 2-year yield rose from 0.58% to 0.62%. Fed funds rate futures continued to price the first rate hike for August.

US data was a mixed bag, Philly Fed and the leading index disappointing, but jobless claims beating estimates.

Australian 3-year government bond future yields bounced from 1.82% to 1.86% while the 10-year yield rose from 2.50% to 2.56%.

Foreign Exchange:

The US dollar index rose by 0.6% from the London morning onwards, recovering from the previous day's selloff which was catalysed by the FOMC minutes.

EUR/USD rose during the London morning to 1.1450, but slumped during the afternoon to 1.1356.

USD/JPY rose from 118.60 to 119.18 before consolidating. AUD/USD's fall late in the Sydney session, caused by rating comments from Standard & Poor's, extended to 0.7757 before it steadied during the London afternoon to 0.7812.

NZD/USD also fell in sympathy with the AUD, from 0.7570 to 0.7507, before steadying to 0.7544.

AUD/NZD made a fresh record low of 1.0301, following the S&P comments on Australia and then bounced to 1.0365.

Commodities:

Oil prices fell overnight after a government report showed that US crude inventories surged for a sixth week, adding to excess supply around the world. 

Crude stockpiles rose 7.72 million barrels to 425.6 million last week, the most in records compiled since August 1982 by the EIA.

Europe:  

The first ever timely publication of ECB minutes confirms that support for the new quantitative easing (QE) programme was not unanimous and highlights the Bank's reluctance to take on more risk related to peripheral governments' debts.

While the ECB has always published full minutes 30 years after the event, from now on it will issue a summarised "account" after four weeks.

There are few surprises in last night's account of the 22nd January meeting. It supports President Draghi's explanation last month that while all members backed the idea of QE, some were not ready to implement it now.

Opponents said that there was "no urgent need for action at the current meeting" and that sovereign debt purchases should be a last resort, only to be used in "an extremely adverse scenario such as a downward deflationary spiral". 

Unless the inflation outlook deteriorates further, this suggests that the policy may remain relatively small.

The minutes also highlight discomfort with any policy that might appear to be bailing out indebted governments or that would put the ECB's balance sheet at greater risk.

We already had a good idea of this - the Bank explained last month that QE would be done largely at the risk of national central banks.

Japan:

Japan's trade position was better than expected in January, posting a deficit of ¥1.18 trillion. Exports grew at a solid pace of 17.0% in the year to January, the fastest pace in a year.

The weaker yen is finally providing support to Japan's export sector.

Lower oil prices will also support the Japanese economy. Imports fell 9.0% in the year to January, largely due to the fall in oil prices.

New Zealand:

ANZ job ads slipped 1.1% in January, the third drop in four months. On a year ago, ads are 6.1% higher. While solid momentum in the economy will continue to support the labour market, recent softening in job ads suggests that the strength in the labour market could be waning.  

Consumer confidence fell in February according to ANZ-Roy Morgan.

The index dropped from 128.9 in January to 124.0 in February, indicating consumers are less optimistic about the outlook. 

Producer prices fell in the December quarter. Output prices fell 0.1% and input prices dropped 0.4%, largely due to lower prices for dairy and oil.

United Kingdom: 

The CBI Industrial Trends survey for February supports other evidence suggesting that the recovery in the manufacturing sector is regaining pace.

The output expectations balance picked up from +13 in January to +25 in February, a five-month high.

Further, while domestic demand remains buoyant, overseas demand appears to be holding up better too, with the export orders balance rebounding from -20 to -8 in February.

Given that the sterling trade-weighted index has risen to its highest level since October 2008, that's a fairly encouraging result.

Looking ahead, strong growth in UK household incomes this year should give additional support to the manufacturing sector's recovery.

United States:

The Philadelphia Fed business survey weakened from 6.3 in January to 5.2 in February, disappointing expectations of a rise to 9.0.

The stronger US dollar and weak overseas demand is holding back the factory sector.

The Philly Fed details were mixed, with new orders falling slightly, shipments rebounding sharply and employment also recovering after a poor showing in January.

As with the Empire State, the best news in this survey is the jump in the future capital expenditure intentions index to 20.9, from 13.2.

That suggests rising capex by manufacturers could go some way towards offsetting the decline in investment in the mining sector.

The US leading index rose by 0.2% in January, less than the 0.3% median estimate. Harsh winter weather was a likely factor, something which other growth indicators have already signalled.

The number of workers filing for jobless benefits fell by a more-than-projected 21k to 283k in the week ending February 14.  

Abstracting from the volatile week-to-week movements, the initial claims data does not suggest any softening in US labour market conditions.


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