Evening Update 10/23/2012

The Aussie was near weekly lows ahead of consumer price data that comes out tomorrow. Expectations are for inflation to be the lowest since 1999, thus spurring the Reserve Bank to cut interest rates. The Aussie and New Zealand dollar erased earlier gains against the dollar after Asian shares fell. The Aussie was last at 1.0288 to the USD and the New Zealand dollar was at 81.58 US cents.

According to a Bloomberg news summary, expectations are for core consumer prices to have risen 2.2 percent in the three months ended September 30 from a year earlier. That compares with a 2 percent increase in the previous quarter. This is the slowest pace since June 1999.

The Reserve Bank of Australia targets annual inflation of 2 to 3 percent. The Bank last reduced the overnight cash rate target by a quarter percentage point to 3.25 percent on October 2. According to Bloomberg, overnight-index swaps see a 99.6 percent chance that the Bank will lower the rate further to 3 percent at their next policy meeting on November 6.

According to Heather Ridout, an RBA board member, Australia’s mining boom has become softer, but isn’t over. Her opinion is that monetary policy makers still have tools to keep the economy moving.

Australia 10-year government yields rose 4 basis points to 3.18 percent. Last week the yields gained to 3.25 percent, the highest since September 24. Australia expects to issue A$45 billion of government debt in 2012-2013, an increase of A$10 billion from the time predicted at the May budget, according to the Australian Office of Financial Management.

New Zealand’s central bank will probably leave the official cash rate at 2.5 percent, a record low, when policy makers meet later this week. New Zealand will sell NZ$1 billion of inflation-linked debt. The 2 percent September 2025 security is expected to be priced soon.

Japan will release data October 26 that will probably show prices excluding fresh food declined for a 5th straight month according to estimates. The Bank of Japan’s goal is for inflation to be around 1 percent and so far it’s far below that. Policy makers meet on October 30.

Wheat production in Australia is expected to decline 28 percent, the lowest level in 5 years. Dry weather has hampered this year’s crop. Australia is the world’s second biggest exporter of wheat.

The harvest is expected to total 21.2 million metric tons in the 2012-2013 marketing year. The survey called for 23.25 million metric tons last month. The official forecast was for 22.5 million metric tons. The crop was a record 29.5 million metric tons last year.

Wheat is up 33 percent this year as dry weather in parts of the European Union and Russia cut global stockpiles to the lowest in 4 years. The dry weather in Australia will likely send prices higher still. Stockpiles keep getting squeezed.

Australian shares pared an early rise after the US Presidential debate added further political uncertainty to US direction. The 2 candidates are in a virtual dead heat in the political race and has markets on edge.

Australia’s benchmark S&P/ASX 200 closed flat at 4543.1. The index was up 0.5 percent earlier, but backed off the highs. The Australian market is up 12 percent year to date and hit a 15 month high last week of 4581.8.

In stock news, Commonwealth Bank of Australia rose 0.8% after Citi recommended it to its buy list. Wotif.com, an accommodation site, surged 16% as brokers raised their earnings estimates after the site raised its commission rates.  Fortescue Metals rose 1.7% following a 1.9% jump in iron ore prices on Monday. OZ Minerals jumped 1.9% after saying its Prominent Hill copper and gold mine was on track to meet guidance after stronger than expected production i the latest quarter. Ten Network gained 1.7% after receiving a A$110 million offer to buy its Eyecorp outdoor advertising business.

Among stocks that fell, AGL Energy lost 1.7% as its profit forecast from a coal-fired power station it bought didn’t meet expectations. Treasury Wine Estates lost 2.4% as UBS and Deutsche Bank downgraded the company.

At this time, US stock futures, metals, energy, and grain prices are all getting hit. USD is relatively higher against most major peers. US chemical company Dupont missed profit expectations and is eliminating 1,500 jobs. The recent miss and profit warnings by several companies is giving investors pause in holding risk assets. Combine that with the upcoming election and US fiscal cliff, and traders are hitting the sell buttons on their screens. Most risk assets have gains for the year and traders want to lock in profits for the year.  Now is not the the time to buy the dip.