“Rio Roars” – the
AFR headline says it all
today. $5bn profit, China,
Japan fuel growth, commodities boom
rolls on, cost pressures increase. That is the story of the day, folks, and it
is the main economic story of the year, possibly even the decade.

In smaller type,
the AFR has “Treasurer admits
tough times ahead”. Henry’s contacts say the Treasury is now “seriously
worried” and this is consistent with both the Treasurer’s headline and the PM’s
forced cheeriness on the 7.30 Report as he endorsed the Reserve Bank’s latest
rate hike.

Overnight the
European Central Bank (ECB) and the Old Lady of Threadneedle Street (Bank of
England) raised interest rates by 25 basis points. Global inflation is on the
rise, gentle readers and Australia, sadly, is one of the
leaders. It is not all about the rise in petrol prices. Measures of
“underlying inflation” – equivalent in central banker talk to “core promises” in
polliespeak – have been rising for some time now and the international
bruvverhood of central bankers has decided a stand must be taken.

The old lady of
Martin
Place issued its half-yearly statement on monetary
policy today, and it could hardly have been clearer. The following are the key
sentences from the RBA statement:

  • Overall, the
    Bank’s assessment following receipt of the June quarter prices data was that
    underlying inflation would remain somewhat higher than had previously been
    forecast.
  • In summary, the
    situation reviewed by the Board at its recent monthly meetings was one in which
    evidence of stronger domestic conditions and inflation pressures were
    accumulating.

Financial markets had already priced in one more rate hike, and bond
yields ticked up slightly. A leading economist told Henry “they have
obfuscated” (obsecrated?) – failed to own up to their mistakes and
avoided saying they have a “bias for tightening”. Thousands of other
market economists will be pouring over the entrails for the rest of
today, and we shall see what they think in due course. It was a lot
more fun when we just sacrificed virgins, it must be said.

Tonight we will
see US employment data, possibly the most
important monthly statistic for global markets, second only to Chairman
Bernanke’s obiter dicta. US jobs have been growing strongly
and another strong number is expected by economists. US bond yields
have fallen by 20 basis points in recent weeks, and this has taken some of the
pressure off Aussie financial markets. Strong US jobs
data would reinstate some of that pressure, so look for Henry’s report on
Saturday morning.

Read more at
Henry Thornton.

Peter Fray

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