ANZ Morning Brief – Obama rejects Republican counter-offer on fiscal cliff

GLOBAL MARKETS:  Another quiet session overnight with sentiment mixed and little in the way of key macro events to provide market direction. US fiscal cliff negotiations continue with President Obama rejecting the latest Republican counter-offer of US$800bn in reduced revenues. On the data front, the New York ISM surprised to the upside in November. US equities were a touch weaker ahead of the close with core bond yields rallying 1-2bps. The Euro Stoxx ended the session 0.3% higher, fading late in the day on rumours of potential credit rating downgrades to Germany and the Netherlands . The story emanated from an article highlighting Germany ’s contingent liabilities and high debt-to-GDP ratio, and in turn raises questions over the creditworthiness of the ESM/EFSF. The USD was generally weaker against the other majors, and the AUD extended yesterday’s post-RBA gains.

CENTRAL BANK WEEK ROLLS ON. The RBA yesterday lowered its cash rate by 25bps to its GFC low of 3%, as had been widely expected. The rates market reaction was fairly muted although the AUD spiked higher on the release. So here we have the AUD up on the night following a rate cut, and still through parity following 175 basis points of rate reductions. This should be a wake-up call for those telling the RBNZ to cut rates in response to the high NZD.  They would have to cut a lot to have a material impact. Guidance on future RBA policy action was left open to interpretation, although ANZ expects an easing bias to be maintained into 2013. Market pricing now sees a 55% probability of a cut in February. Overnight, the Bank of Canada left its key policy rate unchanged at 1% with identical forward guidance to October – “over time, some modest withdrawal of monetary policy stimulus will likely be required”. The focus now shifts to tomorrow’s RBNZ Monetary Policy Statement where the Bank is expected to stand pat on rates for a 14^th consecutive meeting. The ECB and BoE meet on Thursday night with no policy changes expected.

DAIRY PRICES SOFTEN AT AUCTION. This morning’s GlobalDairyTrade auction saw GDT-TWI prices fall 2% on increased supply, although prices remain 20% above July lows. Whole milk powder prices fell 3.5%. We remain comfortable with our milk payout forecast of $5.50 per kg MS for 2012/13.

FISCAL CLIFF NEGOTIATIONS ONGOING. US President Obama said Boehner’s offer of US$800bn in increased revenues was “still out of balance”, and that he would not agree to “vague revenue promises” in exchange for spending cuts (Democrats are hoping for US$1.6tr in revenue savings). The President also said that the US economy was poised to “take off” once a solution to the fiscal cliff had been achieved.