Recap 7-2-12

Main Items:

  • RBA kept rates unchanged at 3.5% as expected, although is market is pricing in almost 3 more cuts this year.
  1. Australia’s terms of trade have peaked, though they remain historically high.
  2. There have been no changes to the Bank’s outlook for inflation… Maintaining low inflation over the longer term will, however, require growth in domestic costs to slow as the effects of the earlier exchange rate appreciation wane.
  3. there has been a material easing in monetary policy over the past six months. At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.

US adds forces to Persian Gulf, sending a signal to Iran – the US has quietly shifted substantial military firepower into the region to act as a deterrent against any Iranian aggression. Iran’s parliament on Sun introduced legislation that would block crude transfers through the Strait of Hormuz to any country participating in the Iranian embargo – NYT

Saudi Arabia – while crude prices may have declined under $100, Saudi Arabia isn’t letting its foot off the accelerator. The country moved into Jul pumping above its normal output for the 6th consecutive month – FT

China June bank lending likely weak – according to DJ, banks in China likely issued far fewer new loans in June than analysts had expected (specifically, China’s 4 largest banks lent 188B yuan in June vs. 250B in May) – DJ/Bloomberg

IMF’s latest COFER data shows that central bank EUR holders declined by 2% in 1Q, mostly in favor of USD and JPY.


  • China Non-Mfg PMI improved to 56.7 in June vs 55.2 prev
  • UK PMI Construction dropped to 48.2 in June vs 52.9 exp and 54.4 prev
  • EU PPI declined to 2.3% YoY in May vs 2.5% exp and 2.6% prev

Upcoming Data:

  • Tues: AU Services PMI, China HSBC Services PMI
  • Wed: US Holiday, Italy Services PMI, UK Services PMI
  • Thurs: BoE, ECB, US ADP Employment, Jobless Claims, ISM Non-Mfg,
  • Fri: Swiss CPI, UKPPI, US Payrolls, Unemployment, Canada Unemployment

Commentary & Links:

In retrospect, it appears that the US has been preparing for a showdown with Iran by asking Saudi Arabia to pump as much oil as possible regardless of spot prices. I’m not aware of another explanation for why Saudi Arabia is continuing to pump despite the massive drop in oil prices over the past couple months. If true, this suggests that the US believes there is a substantial risk of an interruption of Iranian oil shipments in the coming months.

The EU embargo of Iranian oil took effect on Sunday. Iran is exporting far less oil every day than a year ago: about 1.5 million barrels a day versus 2.5 million before the gradual imposition of earlier sanctions. An oil shock is an event that very few participants are prepared for. Monitor closely.

NB: There will be no update tomorrow.