Morning Australian Financial Report - reposted by andre di cioccio

As US markets were closed for the Labour Day holiday, there was little in the way of market action last night. European stocks got another modest boost rising about 0.2% (FTSE and SXXP) to 0.3% (Dax), while S&P futures and the SPI were virtually unchanged falling/rising 1pt to 1104 and 4591 respectively. There was a bit more action as far as European currencies were concerned with EUR down 40pips to 1.2874 and GBP off almost a big figure to 1.5398. I suspect those moves reflect a bit of profit taking after the US payrolls though as there really wasn’t any news or dataflow to spark it. AUD did nothing and sits at 0.9170 while Yen sits at 84.20.

Not a lot on rates either - bunds and gilts were down a bp or so on a 4bp range. Treasury futures nevertheless pushed higher from 1630 with 2s up to 109-21¾ from 109-20¼ and 10s rising to 124-29 to 125-02. Aussie futures were up about a tick with 3s at 95.46 and 10s at 95.09.

About the only news flow of interest concerned an announcement by Mr Obama to allocate $50bn on public infrastructure with more billions to follow over the over the next 6yrs. The expenditure would largely be used to improve roads, rail and infrastructure including airport runways. While the proposal probably has little chance passing congress before the November mid-term elections, it does highlight the concern among policy makers and the desire to be seen to be doing something. In my opinion the US doesn’t need further stimulus right now – certainly nothing more from the Fed and I agree with critics here who suggest further Fed action would be futile. Rates are already at record lows – that’s more than enough. So given this and the demonstrated reluctance by the Fed to engage, I think we can largely rule out further Fed action or at the very least attach a low probability to it occurring. As to fiscal stimulus – well this of course wouldn’t be futile but we need to wait and watch. There will no doubt be plenty of rhetoric coming into the elections, but remember there are a large number of Americans who are opposed to their government taking on more debt. It’s not guaranteed that more stimulus will be coming.

More broadly I think people have unrealistic expectations as to how quickly the US economy can restore the 8m jobs that were lost. Private demand is expanding, it accelerated sharply in Q2 which isn’t an indication that more stimulus is needed. But restoring 8m jobs – even if the labour market was booming – would probably take about 4yrs.

It’s an interesting contrast to what we’re seeing in Australia though. If anything, the RBA could be tempted into removing further stimulus today and under ordinary circumstances I suspect they would. But circumstances aren’t ordinary. Sentiment is toxic (though much improved) and there is a fairly vigorous debate underway as to the health of the US economy. I don’t think the RBA will completely ignore this uncertainty and they’ll probably opt too hold off. Added to that, credit growth is sluggish, the housing market appears to have come off the boil and core CPI moderated sharply in Q2. Nevertheless and for all the reasons I discussed yesterday, I think the statement they release today will be hawkish relative to market pricing.

While market pricing has changed dramatically over the last 5-days - Dec IBs now 13% priced for a hike from 40% for cut 5-days ago - I think there is a fair way to go before futures reflect the likely path of the cash rate. With that in mind my medium term view remains that the whole curve is expensive, will shift up and steepen. In the short-term and noting the reasonable rally we’ve already had, I still this there is value in being short into the meeting and would expect the IB’s and IR curve to steepen. Outright, I don’t have a strong pref for IBs, IR,s or 3s (on a very short-term basis) but I’d be taking any profit on 3s before the US opens. It’s very possible we see a reversal from Friday night’s moves and with little in the way of meaningful data out I wouldn’t risk it.

Anyway that’s about it – nothing much otherwise. Hopefully we’ll find out who will form government in Oz today as well, but another tie can’t be ruled out. Nothing much out globally – BoJ, Taiwanese trade, German factory orders and a couple of ECB speakers.