Global Debt Market - Pain Pain Pain
Global debt market risk premia still rising
As sub-prime concerns refuse to go away
Base metal prices now feeling the pinch
In both $A and now even falling $US terms
Lower $A no longer insulating local motorists from record high $US oil price
Gold back chasing oil higher after seemingly giving up for a while
Global debt markets remain unsettled by sub-prime fallout, as US corporate bond risk premia spreads continue to rise. The spillage to the local debt market is not as severe, because the $A LIBOR spread over cash remains lower than in the US or the UK, even though the local one incorporates an expectation component. Nevertheless, the spread between 10-year swaps and risk-free Commonwealth bond yields is hovering around 100 basis points, roughly double what is before sub-prime losses started to mount in the US.
The long downward trajectory of base metal prices has gone to a new level so far this week, in both $US and $A terms.
But by sharp contrast, the gold price has jumped back up in response to yet another all-time high in the US dollar oil price. And while the Australian motorist was to some extent insulated from the rising oil price when the local currency was lapping at 94 US cents, the aussie s subsequent pull-back has sent the $A oil price up to a new all-time high of almost $112.
The latest bout of sub-prime nerves surely has all but extinguished the risk of another cash rate hike by the RBA next month. But contagion would need to spread well beyond the financial economy to smother the risk of another local cash rate increase in February, unless the late January publication of the December quarter CPI is surprisingly benign, which is unlikely.
As the key Thanksgiving and Christmas shopping seasons approach, all eyes will be on US retailers takings for the first signs that sub-prime contagion is spreading from the financial economy to the real economy.
No topic has yet been nominated for the RBA Governor s address to the Sydney Institute on the 11th of December, leaving him plenty of scope to guide local financial markets on the central bank s assessment of whether sub-prime contagion has the capacity to dampen upside inflation risk.
(See attached file: WEEKLYSNAPSHOT21NOVEMBER2007.pdf)
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Alan Langford
Chief Economist
HBOS Australia
Level 8
BankWest Tower
108 St. Georges Tce, Perth
Western Australia 6000
phone: +61 08 9449 6354
fax: +61 08 9449 6266
e-mail: alan.langford@hbosa.com.au
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