The Big Picture: Global healing should put paid to RBA cuts

Over 2011 and the early part of 2012 there was almost a daily dose of bad news, especially about European economies. Investors reacted as expected with shares being sold off heavily on the day of the new negative event while engaging in “relief rallies” when eventual action was taken to address the problems.

While it took some time, European leaders finally got the message that they had to “do whatever it takes” to deal with the issues once and for all rather than moving from one crisis to another. The flow of bad news began to dry up in the second half of 2012 and investors started creeping back to the sharemarket.

One way of tracking sharemarket volatility is to count the number of days that the ASX 200 either rose of fell more than one per cent. In the six-month period to January 2012 there were 66 days that the ASX 200 either rose or fell by more than one per cent – the most since the end of the GFC period in the six months to April 2009.

Over 2012 this smoothed total of volatile trading days began to fall, and as a result investors became more confident, gradually putting more money to work in the sharemarket.

The reduction of sharemarket volatility has improved to such an extent that there were only nine “volatile” trading days for the sharemarket in the past six months – the lowest total in almost eight years. And, not surprisingly, investors have taken money out of cash, putting it to work in equities.

The last time volatility was as low – over late 2004/early 2005, the ASX 200 was posting annual gains of 25%. Annual gains for the ASX 200 have recently lifted to almost 15%.

The week ahead

One moment it’s a famine, the next it’s a feast. After an incredibly quiet period for economic data, in the coming week the number of domestic economic data releases or events hit double digits. By contrast in the US the data offerings have thinned. But in China inflation and trade data are issued.

The week kicks off with three indicators: job advertisements; the monthly inflation gauge; and building approvals. Job ads have fallen for 10 straight months but with employers trying new hiring techniques, job ads don’t have the same predictive power as they had in the past. Meanwhile the monthly inflation gauge likely showed that price pressures are contained. And we tip a modest 1% lift in building approvals. Signs of healing are appearing in home building.

On Tuesday the Reserve Bank Board meets to decide interest rate settings. On the same day, trade figures are released alongside the Performance of Services gauge and the Bureau of Statistics (ABS) measure on house prices. We don’t see the need for the RBA to touch rates, especially with more signs of global healing appearing.

On Wednesday retail trade data for December and the December quarter are issued. By all accounts consumers spent cautiously on the lead up to Christmas but made up for it with some solid Boxing Day sales. Overall we tip a 0.2% lift in spending. The focus will be on sales of large retailers including chain stores as it is a superior gauge of consumer spending. Data on tourist arrivals and departures is also released on Wednesday.

On Thursday the ABS issues January data on employment and unemployment. We expect the results to defy gloomsters yet again with 10,000 jobs created. The unemployment rate probably held near 5.4-5.5% – one of the lowest rates in the developed world. Also on Thursday the Performance of Construction index is issued together with the NAB business survey for the December quarter.

And on Friday the RBA issues its quarterly Statement on Monetary Policy – a comprehensive assessment of economic conditions including the latest forecasts for economic growth and inflation.

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