Australian 4th Q GDP declines shaply

Australian 4th Q GDP rose by just +0.4% Q/Q, well below the +0.8% forecast, or +2.3% YoY (+2.4% forecast). However, analysts (marginally) expect the the RBA to hold its benchmark interest rate at the current 4.25% next month. Well, maybe, but the RBA will be cutting rates relatively shortly. Household spending rose by a sluggish +0.5% during the Q, the lowest since the 1st Q of 2010. Residential construction declined by -3.9%, the worst in almost 3 years, reflecting the significant decline in residential home prices in 2011, from vastly elevated levels. Developments in China, in particular, will impact Australia, which suggests to me that the Australian economy will remain weakish;

Analysts expect New Zealand, South Korean, Indonesian and Malaysian Central banks to remain on hold this week. The higher oil price is threatening to increase inflation;

Further gloomy data from Spain. January industrial output declined -4.2% YoY, worse than the forecast decline of -3.9%.

Greek authorities/press report the following in respect of the proposed PSI proposals:

The target of over 90% is unlikely;

The participation rate is expected to be between 75% – 80%;

If the participation rate does not reach 2/3rds, there will be an involuntary haircut of 90% ie a default, triggering CDS’s;

If the participation rate is between 2/3rds and 75%, the CAC’s will be utilised – a trigger for CDS surely;

However, some of the outstanding Greek debt is governed by English law and a number of Hedge funds have invested in these bonds. The most likely scenario is that they will paid out on their CDS’s.

It was interesting to note that Greek markets were quite firm yesterday, in spite of weaker European markets. In addition, the whole saga as to when CDS’s are paid out or not is getting ludicrous. As my friend Barry Ritholtz points out (he edits the excellent financial blog “The Big Picture”, which you should subscribe to – its free as well), that the Greek PSI deal is effectively a default and CDS’s should be paid out – could all this nonsense (to date the ISDA allege that there is no default) reflect the membership of the ISDA (who opine as to whether a CDS is triggered), which comprises representatives of the financial institutions that wrote these contracts. I would expect that a number of market participants will want more clarity and transparency going forward – why buy CDS’s otherwise.

Believing Greek politicians is a sure way to become bankrupt, but I would guess that the PSI deal will go ahead, with CAC’s invoked and, as a result, CDS’s triggered;

EZ flight to safety continues. A German 5 year bund auction was sold out at a record low yield of just 0.79%;

However, German optimism as to the strength of their manufacturing sector and that they are immune from the turmoil in the EZ, took a bit of a knock today, as January factor orders were down -2.7% MoM (December +1.6%), way below forecasts for a rise of +0.6%. YoY orders were down -4.9%. Orders outside the EZ were -8.6% lower (+12.1% in January), though interestingly EZ orders declined by just -0.4% (-6.5% in January). Domestic orders rose by +0.9%. Not withstanding the weak numbers, the non EZ orders decline seem abnormal and a recovery is likely in coming months;

Brazil’s economy declined sharply to +2.7% in 2011 (roughly a 1/3rd of 2010 GDP growth) and the lowest since 2003, though slighly less than the forecast rise of +2.8%. GDP grew by just +0.3% in the last Q, though above the -0.1% in the 3rd Q (on a QoQ basis) and slightly higher than the +0.2% forecast. The Central Bank is expected to continue to reduce interest rates.The Finance Minister expects GDP growth of +4.5% this year – Hmmmm, the Central bank’s forecast is +4.15%. Economists expect +3.3% GDP growth. If China slows, as expected, Brazil will be negatively impacted, given the amount of commodities shipped to China;

Mr Romney won overall on Super Tuesday, but not by the knock out that he needed. Looks like this is going to go on. However, Romney is the clear favourite heading into the convention. However, commentators suggest that the Republican party may reconsider whether Romney is the appropriate candidate at the convention – seems like to want to commit suicide to me if that’s the case, but…..;

ADP February payroll data rose by +216k, in line with forecasts of +215k (+170k in Jan).


European markets are cautiously higher and awaiting the US market open. Oil (spot  Brent) is hovering around US$122.55 – would have expected that the announcement of talks with Iran would have brought it down further. Euro is flat at against the US$ at around US$131.20. Gold is at US$1680, up US$8 on the day.

Markets are waiting for tomorrow re the PSI on Greek debt.

ECB/BoE meetings tomorrow – no change.

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