Thursday, August 21, 2014

Fed softening world up for rate rise in early 2015

Throughout the year, the US Federal Reserve has been softening up for the world for what - at the moment at least - appears to be inevitable.

Once the US economy is on a firmer footing, inflation starts rising and the labour market has sufficiently strengthened - interest rates will need to move from their current emergency level of between zero and 0.25 percent.

But the big question has been one of "when".

The minutes from the Fed's July meeting released early this morning Australia time stoked anticipation about what will almost certainty be a dramatic event for global financial markets.

"Many participants noted that if convergence toward the committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated". 

The unusually direct and optimistic tone from the Fed - almost six years after the Wall Street collapse - was fresh fodder for pundits who are now talking about a small rate hike early next year.

The changed language comes as the Fed's massive quantitative easing program is set to evaporate in October, having been reduced by a steady US$10 billion per month since late last year.

This time last year, the money printing program was pumping out US$85 billion per month as speculation began to build that an improving labour market meant the party of cheap and easy money was about to end.

Today's measured signal is not to say the messages from the Fed have always run to plan.

Back in March, in her first major appearance as the world's most powerful central banker, Federal Reserve chair Janet Yellen perhaps accidentally triggered the softening up strategy she told reporters that the first rate rise could be six months after the money printing ends. 

REPORTER: Could you tell us how long of a gap we might expect before the rate hikes do begin?

JANET YELLEN: You know, probably means something on the order of around six months or that type of thing but you know, it depends, what the statement is saying is it depends what conditions are like. 

Those surprisingly frank comments from Dr Yellen sparked a small fall on Wall Street as the prospect of an eventual rate rise began to take on some distant reality.

This morning's reaction was more subdued as investors focused on what they saw as positives - that the Fed will continue to support America's still-recovering economy for as long as needed and that any rate movement will be gradual.

While the US jobless rate is down from global financial crisis highs to 6.2 percent, there's growing scrutiny on hidden unemployment and whether the quality of jobs on offer amount to what America once regarded as a living wage.

Wednesday, August 20, 2014

BHP Billiton boss plays down Clive Palmer's "bastards" & "mongrels"swipe at China

The chief executive of BHP Billiton has played down Clive Palmer's comments that the Chinese are "bastards" and "mongrels" who shoot their own people.

Andrew Mackenzie says the relationship that BHP and the Australian government has with China remains warm and strong despite Mr Palmer's slap-down.

But the federal government has attacked Mr Palmer's comments about Australia's biggest trading partner as "hugely damaging" while the Chinese Embassy has branded them "absurd and irresponsible".

The diplomatic war of words overshadowed  a 23 per cent jump in BHP's full-year net profit to US$13.8 billion which in large part is from its trade with China.

Mr Mackenzie told AM that Mr Palmer's swipe, directed at the state-owned firm Citic Pacific, is unlikely to cause long term damage to either BHP or Australia.

"I believe that the strength of our company's relationships and the relationships that are enjoyed at government level and also many other companies are warm," Mr Mackenzie said.

"The mutual regard for the quality of our product, the security of our supply, are the ones that are going to rank more highly .. in the minds of the Chinese.

"China can see through that and the vast majority of Australians and how they relate to the Chinese people  and their country."

Mr Mackenzie sought to characterise Mr Palmer's comments on the ABC's Q&Aprogram as personal as the the federal government cautioned the mining magnate not to misuse his political postion.

"They're comments by an individual and you know, they're not on behalf of any other Australian supplier. And I do repeat that I think the quality of the relationships and the way in which companies like us and many others is what will actually be the bigger picture that'll be seen by most if not all Chinese. "

The head of the world's biggest miner also weighed in on the government's difficulty in getting key Budget measures though the Senate and agreed the impasse was a threat to business and consumer confidence.

Not surprisingly, Mr Mackenzie called for the urgent repeal of the minerals resource rent tax (MRRT) which was one of the Abbott government's key election pledges.

"I am concerned about that. I'm very supportive of the Government's agenda to build the competitiveness of Australia," Mr Mackenzie told AM.

"Something like the MRRT raises very little revenue, is highly volatile, and is no basis for strong fiscal planning in the country. And yet for many potential investors this is quite a disincentive to invest."

But Mr Mackenzie had a pragmatic response to growing calls for a Budget "reset" or a mini-Budget to smooth passage through the Senate - and to win approval from Clive Palmer's PUP which hold the balance of power.

"Look, I'm a businessman and they're politicians and politics is the art of the possible. I leave that to them."

Tuesday, August 19, 2014

Reserve Bank warns of "significant uncertainty" about economic outlook

The Reserve Bank says the outlook for Australia's economy appears uncertain and that the high exchange rate remains a key problem.

Underscoring the challenge of managing an economy in transition, the RBA has pointed to "a significant degree of uncertainty about the the outlook, given the number of forces working in different directions".

And in the minutes from its August meeting, the RBA says that despite a record low cash rate the exchange rate "remained high by historical standards".

The RBA also says the high dollar is "notable" given the decline in the prices of some key commodities.

Appearing to express some frustration in the face of a record low cash rate, the Board says the high dollar is "offering less assistance than it might in achieving balanced growth in the economy".

The RBA has cut the cash rate by 2.25 percentage points since November 2011 with the aim, in part, of lowering the currency.

In leaving the cash rate on hold at 2.5 percent at the August 5 meeting, the Board repeated that monetary policy "was appropriately configured" and that "the most prudent course was likely to be a period of stability".

The August meeting was held two days before the release of official employment figures for July where the jobless rate spiked unexpectedly to 6.4 per cent.

In its Quarterly Statement on Monetary Policy released after the surprise unemployment increase, the RBA signalled the result could have been a blip caused by a revised definition of employment.

However, the RBA's August board meeting was referred to "a notable degree degree of spare capacity" in the workforce with a relatively high unemployment rate and the participation rate remaining steady.

Echoing the quarterly statement, the Board was told that despite recent higher reading, inflation was remain within the 2 to 3 per cent target band over the next two years.

The minutes repeat that economic growth will be below average over 2014/15 before getting back above average pace in 2016.

Thursday, August 14, 2014

Commonwealth Bank boss Ian Narev signals need for gov't compromise on budget woes; warns uncertainty not helping business and consumer confidence

The chief executive of the Commonwealth Bank has weighed in with advice on the government's budget woes, signalling compromise might ultimately be necessary.

Ian Narev has told the "AM"  program that the Prime Minister and Treasurer need to be pragmatic about what spending and cost-cutting measures will make it through the Senate.

Mr Narev says while the government's controversial paid parent leave policy "is ultimately a political judgement", in the eyes of voters it was a key part of Tony Abbott's election mandate.

"By and large, I think when people elect politicians they understand they stand for certain policies but we've also got to be pragmatic and understand that in a certain political environment that governments need to make compromises," Mr Narev said.

But Mr Narev rejected suggestions that a review of all budget measures in the form of a mini budget might be necessary to reset the debate.

"I'm not sure a mini budget is the answer. The Treasurer can make his own judgement on that. He has outlined what we consider to be a very appropriate high level vision which is to say over the medium to long term you need a government which is fiscally responsible," Mr Narev said.

"In order to achieve that, there's a series of  policies that need to be passed showing where the  allocation of that is going to happen in terms of cost cutting or revenue raising.

"That is a big political challenge in the context of the current makeup of the Senate." 

Mr Narev also warned that the uncertainly surrounding elements of the budget had the potential to harm business and consumer confidence.

"It doesn't help. But there's no doubt that to the extent we can get a very clear medium to long term policy picture of the environment, that most be good for confidence.

"The budget is a challenge. We've got a lot of a lot of political tensions still in Canberra, there's a lot of debate around individual policies and it is a tough time to be the government."

Mr Narev, who was speaking after the CBA revealed a full year net profit on $8.63 billion, said the government needed consider how its budget problems might be viewed by international ratings agencies.

Last week, respected economist Saul Eslake warned that a failure to get the budget deficit below $3 billion as forecast by 2017-18 could put Australia's AAA credit rating in the spotlight.

"He (Mr Hockey) has outlined  that he feels that is a risk and I think there's no doubt that there is a risk," Mr Narev told AM.

"The idea of getting  the fiscal balance sheet to the point where it is in balance has got to be a critical part of the economic vision.

"The ratings agencies in the long term are some of the important stakeholders you've got to bear in mind."

Wednesday, August 13, 2014

Commonwealth Bank record profit fails to quell heat from financial planning scandal

For Ian Narev, today's full year financial results presented a rare opportunity to accentuate the positive.

There was little else to do given the damage already done to the Commonwealth Bank's reputation over the scandal embroiling its financial planning arm.

So today, the full tool box of public relations spin was deployed as the results hit the stock exchange just after 8.30am.

Here's my analysis from today's edition of The World Today.

Not surprisingly, the CBA's team of media, investor and government relations advisors have spent recent weeks and days polishing messages and preparing Ian Narev and chief financial officer David Craig for the inevitably tricky questions on how they plan to defuse the fallout from the scandal.

This morning's investor briefing was a tame affair and Mr Narev was under little pressure to account for the conduct of his financial planners.

However, journalists are certain to pose harder questions at a media conference later today given the financial and reputational cost to the CBA, which over 102 years has been trusted for its conservative strategy and management.

The intensifying scrutiny is unavoidable, and today despite some hoarseness, Mr Narev will embark on print, television and radio interviews that will run until late in the afternoon.

And given the widespread concern about the financial planning scandal, Commonwealth Bank media minders are likely to have received interview requests from the range of media outlets across Australia.

As the CBA boasts in today's media release on today's results, there are nearly 800,000 households who own the bank's shares directly or through their superannuation schemes.

And in addition to employing 50,000 Australians, the CBA reminds us of its contribution to the economy and $4 billion pumped into local suppliers and partners.

The CBA brands itself with charities, sporting organisations and communities across the country with big financial contributions that are part of its charter for corporate social responsbility.

However, even another record result of $8.63 billion posted today will not be enough to deflect the glare of a concerned federal government and a corporate regulator under pressure to lift its game.

Ian Narev knows it will be a long road before the noise from the scandal begins to fade.

But it emerged on his watch when he was a key member of the CBA's senior management team and one that could partly define his legacy as chief executive.