Hot CPI Sends Aussie To New Highs

The Aussie and the 10-yr yield were dominated by today?s CPI report, the figures printing much stronger than prior quarter and above market?s expectations, driven by housing and energy prices. The Australian equities index was less fortunate, losing 1.27% of its value driven by the global equities decline.

[B]Oil Search slashes output forecast[/B] - Oil Search was unable to bring on four production wells this year, which resulted in almost 10% reduction of their 2007 production forecast. However, the company?s managing director Peter Botten sees it as production foregone, not lost. Oil Search is planning to catch up in 2008, working on several development projects. The most promising is a plan to buy gas and build a two-train facility with a capacity of up to 7.2 million tonnes, which have reduced capital cost and more flexible project structure, facilitating future expansions. Source: The Australian,25197,22129483-5005200,00.html
[B]Fall in world stocks a ‘timely reminder’[/B] - The ongoing concerns about the US housing market resulted in worst day for the Dow index since March 13. London, Berlin and Hong Kong also fell and the Australian ASX followed the global decline. Prime Minister John Howard made a political statement out of it, stating that the Australian economy needs “people of experience and proven record” to preserve its strength. Source: Herald Sun,25197,22129483-5005200,00.html
[B]V Australia ‘will boost tourism, create jobs’[/B] - Virgin Blue announced today that it?s new V Australia airline project was close to fruition after gathering an approval from the Australian regulators to fly nonstop flights on Australia-US route. The already most profitable trans-Pacific flight is projected to further increase the volume. With Australian tourism business rebounding at the moment, the improved transportation will facilitate extracting more tourism dollars from the American market, according to Federal Tourism Minister Fran Bailey. Managing director of Australian Transport and Tourism Forum Christopher Brown said that Australia was forecast to welcome around 811,000 visitors from the US annually by 2016. There is no doubt that such boost of the tourism industry will create many jobs. However, Mr. Brown?s pointed out that the industry needed to ensure that there are sufficient skills and labor resources to cater to the new jobs. Source: Herald Sun,21985,22132192-5012062,00.html

The Australian inflation accelerated more than expected, putting pressure on RBA to hike again. The figure pushed the Aussie to new highs, making it a rapid recovery from the recent dip caused by the carry trade sell-off. The CPI figure printed 1.2% versus 1.0% expected by the market, way above the 0.1% prior figure, highest since July of the last year. The Aussie reached as high as 0.8871 marking a fresh high.

[U][B]Stock Market
The ASX has little choice but to succumb to the immense negative pressure from the global equity markets, led by the Dow index, which saw its worst day since March 13 yesterday. BHP and two large banks: Macquarie Bank Limited and National Australia Bank were the largest index movers, certainly being some of the most global companies in Australian economy. The world?s largest mining company BHP Billiton slid 1.9%, international banking group NAB fell 1.5% and Australia?s largest investment bank with global presence, Macquarie Bank, fell 2.9%. The index lost 81.8 points, wiping out this week?s gains and closing at 6340.5.

[U][B]Bond Market
The bond yield took mild dip from the slipping US and global yields at the open. However, the CPI report released at 21:30 EST that has shown acceleration of the inflation beyond what the market expected has changed the picture drastically. The speculations that RBA will hike in August have increased. The carry traders that picked up the hot yield put downwards pressure with their demand for the Australian bonds. After a drop of about 2 bps the 10-yr yield recovered a little and closed at 6.115%, up 2.2 bps from yesterday.