• Its been like Ground Hog day over and over again with each day bringing news that a deal was imminent only to see it delayed another day. And when a deal involving further austerity measures equal to around 1.5% of GDP and economic reforms finally was agreed to by Greek political leaders concerns then arose that it may not be approved by the troika (with Germany demanding more) or by the Greek Parliament amid ministers resigning, street protests and a general strike. The associated uncertainty saw shares, commodity prices, the euro and the $A fall late in the week.
• A second Greek bailout by March 20 is still more likely than not because both sides have too much too loose if agreement isn’t reached, but the bickering might continue well into March and the risk of disorderly Greek default has clearly stepped up a notch in the last few days. The Greek Parliamentary vote on passing the agreed deal into law is due in the next few days and Euro-zone finance ministers are scheduled to meet on Wednesday. Longer term, Greece is likely to continue to struggle to meet its deficit targets as austerity bears down on its economy which is already in tatters, as evident by a 20.9% unemployment rate.
• In Australia, the Reserve Bank left interest rates unchanged, resulting in many home borrowers seeing a hike in their mortgage rates as some banks passed on higher funding costs. While it appears the RBA retains a bias to ease, its hurdle to do so looks higher than earlier thought, requiring a “material” weakening in the domestic economy. Our assessment remains that there is a strong case to cut rates further. Yes the mining sector is doing well, but retailing, housing construction, manufacturing and tourism are all doing a lot worse than need be. What’s more the rise in the Australian dollar this year has delivered a de facto monetary tightening as has a rise in mortgage rates from some banks. Given the rise in funding costs faced by the banks there is no point blaming them, but its nevertheless bad news for borrowers and bad news for the economy as mortgage rates should be going down not up. To get mortgage rates down and deal with unnecessary weakness in key parts of the economy, we still expect a further 0.25% to 0.5% in rate cuts by mid year.
• Other global central banks continued to ease with more quantitative easing from the Bank of England, another easing in collateral requirements from the ECB and another rate cut in Indonesia. Global reflation is continuing.

Major global economic releases and implications

• While China’s inflation rate hooked up to 4.5% in January, it’s unlikely to change the outlook for further policy easing in China. Most of the rise was due to higher food prices which in turn was largely driven by the New Year holiday, non-food inflation fell further to 1.8%, upstream producer price inflation continued to slow in January and the trend for inflation is still down from last’s July’s peak of 6.5% and is likely to remain so reflecting cooling economic growth and last year’s slow down in money supply growth. Selective monetary easing appears is continuing with talk of help for first home buyers and some banks cutting first home mortgage rates. Chinese January data for exports, imports, lending and money supply were also distorted by the New Year holiday and should be treated with caution.
• US data was mostly solid, with a further fall in unemployment claims, a strong gain in consumer credit solid weekly chain store sales and a modest rise in weekly mortgage applications. A $US25bn settlement between banks and the US Government was announced that will provide some modest relief for struggling home owners.
• US earnings news was favourable. So far 64% of companies to have reported have exceeded expectations, which is up from 47% a few weeks ago. While financials, basic materials and telcos’ have been week, tech, industrial and consumer services stocks have done very well. In Europe only 49% of companies have surprised on the upside, compared to a norm of about 57%.
• The news out of the rest of Asia was mixed with weak export data in Taiwan but robust GDP growth in Indonesia.

Australian economic releases and implications

• Australian economic data was mixed. The ANZ’s measure of job ads rose solidly in January, but this is often a month distorted by seasonal factors. More importantly retail sales remained depressed and a construction activity index weakened. TD Securities’ Monthly Inflation Gauge remained benign on an annual basis in January.
• Only a handful of companies have reported, but so far the December half profit reporting season in Australia is off to a mixed start with better than expected results from 47% of companies (compared to a norm of 45%) but worse than expected results from 40% (versus a norm of 25%). 64% of companies have reported positive year on year profit growth but outlook statements have come in on the cautious side and investors have greeted the results negatively with most stocks seeing their share price fall after results were released.

Major market moves

• Share markets fell late in the week, as positive news regarding a Greek deal on its second bailout package was replaced by fears that it was unravelling. 
• Greek concerns also knocked commodity prices, the euro and the $A lower late in the week. This came after the Australian dollar reached a high of $US1.0845, it’s highest since last August.

What to watch over the week ahead?

• In the US, expect January retail sales (due Tuesday) and industrial production (Wednesday) to show further gains, various surveys of manufacturers, home builders and small businesses to show continued recovery, housing starts and permits (Thursday) to rise and inflation data (Friday) to be reasonably benign. The minutes from the Fed’s last meeting (Thursday) will be watched closely for further clues on the monetary policy outlook but are unlikely to offer anything new beyond the clearly dovish stance already signalled by the Fed’s post meeting statement.
• Euro-zone GDP (Wednesday) is likely to show flat to slightly negative growth in the December quarter. The Greek parliamentary vote on the austerity package will be watched closely. Euro-zone finance ministers will then meet on Wednesday to hopefully approve the Greek bailout package.
• In Australia, expect housing finance data (Monday) to show a small rise, the NAB’s business confidence and conditions indices (Tuesday) and consumer sentiment (Wednesday) to have remained soft and January employment data to show a modest 5000 job rebound after the 29300 fall in December to see the unemployment rate rise to 5.3%.  Speeches by the RBA’s Debelle and Lowe on Tuesday and Thursday will be watched closely for any clues on the outlook for interest rates.
• The December half profit reporting season will ramp with over 50 major companies due to report including Leightons, the Commonwealth Bank, AMP, Qantas and Wesfarmers. Overall results are likely to be weak with soft domestic demand, cost pressures, falling commodity prices and the strong Australian dollar all weighing. Retailing, manufacturing and housing related sectors are all likely to be particularly hard hit and while underlying profits in the resources sector will remain strong, growth will be sluggish thanks to high base effects and lower commodity prices. Profit growth in the December half is likely to be near zero. The downside risks are seen to be high, but everyone is expecting that suggesting there is scope for a positive surprise or for the market to look beyond current soft results.

Outlook for markets

• Shares are vulnerable to a short term pullback after strong gains so far this year, and this may now be occurring on the back of Greek worries. However, the broader trend is likely to remain up. Valuations are attractive particularly against very low bond yields, the risk of a Euro-zone meltdown has receded, momentum in global economic indicators has turned positive, global monetary conditions are easing and there is lots of cash on the sidelines. We continue to see the ASX 200 pushing up to 4800 by year end, but given the RBA’s more hawkish stance and the strong $A the Australian share market is likely to remain a relatively underperformer for now.
• Low global bond yields in major countries suggest low returns unless Europe’s debt crisis intensifies. Australian corporate debt is a better investment proposition if one needs income or is worried about shares.
• Like shares, the $A is also due for a correction but the broad trend is likely to remain strong helped by more quantitative easing in the US and Europe, solid commodity prices and improving global confidence. A retest of $US1.10 in the next few months looks likely.

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