Australia watch: Consumer sentiment dropped in May for the second month in a row and by the biggest amount since October 2008 when the credit crunch and recession were intensifying. The catalyst this time, the third interest rate rise in a row this year from the Reserve Bank and the worries about Europe and sharp market falls, which continued today with our market hitting eight-month lows. The Westpac-Melbourne Institute consumer sentiment index for May fell 7% to 108 index points. The survey was conducted last week after the federal Budget and a week after the Reserve Bank boosted rates to 4.5%, the sixth rate rise since last October.

Retail watch: David Jones topped the performance list for chain stores in the third quarter, but couldn’t escape the slowing in activity in retailing in the three-month period (to April 24). It said today total sales for the quarter were $417.4 million, a rise of 1.4% on the same quarter of 2009. Like-for-like (or same store ) sales also grew by 1.4% compared to the third quarter of last year, better than rival Myer, which yesterday reported flat top-line sales and like-for-like growth of just 0.3%. For David Jones the third quarter performance was also the slowest of the year so far. Second quarter growth was 2.4% (like-for-like, 3.1%). Growth so far, 2.1%, like-for-like sales growth, 2.0%. And struggling Melbourne-based retailer Clive Peeters is in talks with its bankers after asking for its shares to be suspended. It was hit by a multimillion dollar fraud last year.

Wage watch: And for all the frothing at the nose from business and their media mates this week about the ACTU’s request for a $27 a week wage rise for our lowest-paid workers, there’s some unwelcome news that they will all ignore, as they do. Wages are not running amok. In fact the Australian Bureau of Statistics Labour Price Index for the March quarter showed a rise of just 0.7%, the fifth consecutive quarter where the rise has been less than 1.0%. The private sector wage price index rose by 0.6% compared to 1.1% for the public sector. For the year, the wage price index rose 2.9%, according to the ABS. The big driver was again public sector wages, where the index rose 4.2% over the year, against a 2.5% increase for the private sector. As in the December quarter, the ABS said the difference between public and private sector wages growth was the largest since the series started.

Greek watch: Greece is safe, the first instalment of emergency loans was transferred by the European Union one day before €8.5 billion of bonds come due later today. A total of €14.5 billion was sent, enough to cover Greece’s financing needs for June as well. The IMF ponied up for €5.5 billion as well. Greek bonds rose, so all was almost well. But not quite. The euro fell to new four-year lows of about $US1.216 and the Aussie dollar slid to closer to 86 US cents. US interest rates continued to fall as investors rushed for safety. The yield on 10-year bonds fell to 3.38% overnight from 3.47% on Monday. Overnight the Greek tourism minister was sacked because her husband had had not paid tax of a reported €5 million. He is a nightclub singe.

Lemming watch: The rush for safety was best illustrated by the May fund managers survey from Bank of America Merrill Lynch. The survey was taken in the week of the €750 billion bailout/support package for Europe was announced on May 10. Big global fund managers lifted their cash holdings and headed for the safety of the US. Managers cut back their holdings of shares, many went from overweight to underweight and many were also more bearish on China than they have been since early 2009. A net 46% of the fund managers surveyed expects the euro to fall, up sharply from a net 23% in April. A net 30% of investors say that the eurozone is the region they would most like to be underweight, the lowest reading recorded in the survey. The figure in April was just a net 13%. A net 66% of the managers survey expect the US dollar to rise, which it continues to do.

Euro shorts: Germany’s BaFin financial-services regulator said that it will introduce a temporary ban on n-ked short-selling and n-ked credit-default swaps of euro-area government bonds starting at midnight Tuesday, European time. The ban also applies to n-ked short-selling in shares of 10 banks and insurers including the giants, Allianz SE and Deutsche Bank. That brought back memories of post-Lehman Brothers collapse in September 2008 when shorting was banned or restricted in many countries. The ban is in place until March, 2011. N-ked shorting is when you sell a security you don’t own or haven’t borrowed. The euro fell 1 US cent on the news, taking markets in the US down after Europe was a bit firmer on the day.

UK inflate: Fore the new Conservative/Lib Dem government in Britain, an early headache ahead of a statement later today on the economy. Inflation hit a high annual rate of 3.7% in April, up from the 3.4% rate in the year to March. That means inflation is above the government’s 3% upper limit three months after the previous breach, so Bank of England governor Mervyn King must now write to the new Chancellor of the Exchequer, George Osborne, to say what he will do to bring prices under control. He won’t put rates up and the Bank of England has already indicated it sees inflation peaking and falling to less than 2% next year (which is a belief that the UK economy won’t be growing). Inflation rose 0.6% in April from March.

US watch: Wal-Mart, the world’s biggest retailer, lifted sales and lifted profits in the first quarter of this year. The rise in profits came courtesy of cost cutting: sales rose about 6% across the group worldwide, costs were up about 3.9%. Wal-Mart shares rose, then eased to close up 1%. But the enthusiasts on the day ignored another fall in same store sales in the company’s American heartland. The company said sales at its US stores open at least a year fell 1.4% in the first quarter against a year ago, when comparable sales rose 3.4%. As the economy has improved, customers who traded down to Wal-Mart to save money, have traded back up to the likes of Target (same store sales up 2.8%) and other chains. Same store sales also fell in its British subsidiary Asda for the first time in four years. They were down 0.3% in the first quarter, against a rise of 4.6% a year ago.

US watch 2: For Wal-Mart though, the pressure isn’t going to ease soon. The company forecasts negative same store sales growth this quarter of between 1%-2%, compared with a 1.5% fall in the same quarter of 2009. Same store sales fell in the normally solid fourth quarter by 1.6%.  Wal-Mart paints a bleak view of its US customers, saying that the use of foods stamps and other government benefits to pay for its goods is up significantly from a year earlier. “More than ever, our customers are living paycheck-to-paycheck,” said chief financial officer Tom Schoewe. That’s the unfortunate reality of the American economy. About 40 million people in the US will be on the food stamps program this year and that is forecast to rise to more than 43 million by the end of 2011. What recovery.

US watch 3: US housing starts rose to a 672,000 annual rate last month, the highest since October 2008. That was up 5.8% from March and 40.9% from the very depressed level of a year ago. But building permits fell 11.5% to 606,000 from March, but were 15.9% above the April 2009 estimate. OK, but not that convincing. But the backlog of new homes for sales is just 228,000, the lowest since March 1971 and perhaps the most positive bit of news yesterday for the industry.

US watch 4: A big surprise was the unexpected drop in wholesale prices in the US last month. Figures overnight showed a fall of 0.1%, the second in three months and a sharp rise of 0.7% in March. Core prices (excluding food and energy)  rose 0.2% against the 0.1% rise in March. Again, inflation is not a problem in the US at the moment, or for the foreseeable future, despite what the gold bugs and their loony mates might write and proclaim. US consumer price inflation figures are out tonight.

China watch: But in China, many Western analysts see the inflation bogey everywhere. Doom, gloom, they screech, especially after the April inflation rate rose to 2.8% annual from the 2.4% rate in March. Well, they will have an opportunity to screech some more because the Chinese government yesterday forecast inflation would rise to 3% in May and June. China’s key economic planning body, the National Development and Reform Commission (NDRC) said in a statement the inflation rate for those months would rise because of the negative growth in the same months of last year and the 1.9% rate last December. That only puts consumer price inflation at the government target of 3%, similar to Australia.

Mung beans and garlic: The commission forecast that the CPI would average 2.5% in the six months to June. It is the second example of the government softening up the markets for another inflation rise in the past three weeks. An article on Xinhua early this month explained by the CPI would rise to an annual 2.8% in April. With the government cracking down on property speculation, Chinese media are reporting that speculators are punting on mung beans and garlic to take advantage of shortages and price rises because of the continuing drought in southern China, which has helped drive up consumer prices in the past six months.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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