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The world grain trade is facing its biggest shake up in years as American farmers lift corn planting to the highest level since 1944 to take advantage of surging prices pushed higher by the rising demand for ethanol.

In a move with possible consequences for Australia and Australian exports to China, the Bush Administration has hardened its attack against Chinese imports.

It’s a move that could threaten the freedom of global trade and the global economy.

It’s not the first time the Bush Administration has done this: they introduced quotas on steel imports about eight years ago and also on imports of Australian lamb: both were done to protect inefficient US producers and in the case of steel, they caused immense damage to America’s reputation.

Nor is it the first time action has been taken against Chinese imports but this time the Government is using a more powerful punishment: counterveiling duties instead of anti-dumpuing duties.

But this is the first time they have used counterveiling duties against China, America’sfastest growing source of imports (for companies like Wal-Mart) and its second biggest creditor, with much of its foreign reserves of $US1.1 trillion held in US Government bonds and other treasury securities.

The potential for China to retaliate by dumping some of these holdings and switching more quickly to other currencies (which it has said it will do gradually over the next couple of years) is now a real possibility.

This is a dispute every Australian investor should monitor closely because if China and the US get into a trade war (Australia has to back China) then the resources boom could be curtailed through a drop in demand from Chinese importers.

The US Commerce Department reversed more than two decades of practice and decided late last week to levy countervailing duties to compensate for alleged Chinese subsidies to exporters.

Trade commentators say the policy change opens the way for steel, textile and other US manufacturers to apply for the same protection: US steel and textile producers in particular have been lobbying for action against Chinese imports of these products.

A move against steel imports would hit world steel prices hard, hurt Chinese consumption of Australian iron ore, coal (in small amounts but projected to increase) and energy imports of LNG.

That would in turn hurt a host of companies such as BHP Billiton, Rio, Fortescue Metals, Woodside, Macarthur Coal and Centennial Coal. The list is long.

So will rates rise this week?

The betting is even money for a 0.25 per cent lift to 6.50 per cent, and there are even some commentators wondering if there will be another rate rise after this one (which might not happen anyway).

Commentators are split on whether a rise will happen this week or in May, but there’s been a change in consensus over the past three weeks.

Interest rates are unlikely to rise when the Reserve Bank of Australia (RBA) meets next week, according to a majority of economists surveyed by AAP.

The news agency surveyed 19 economists and just seven expect an increase on Wednesday, 10 of the economists say the RBA could raise the overnight cash rate from 6.25 per cent some time in 2007, while two are forecasting a cut.

The most common factors mentioned were a shortage of skilled labor, resilient consumer confidence and fears of a renewed outbreak of inflation.

A couple mentioned the stronger dollar as perhaps helping the RBA not to move saying it would help limit the growth in import prices (oil products in particular).

Investment bank, Goldman Sachs JB Was were being cautious and telling clients late last week that a rise probably won’t happen this week.

And AMP’s Dr Shane Oliver believes that while the recent run of solid economic data has raised the risk of another interest rate hike, “on balance we think the RBA will leave interest rates on hold preferring to wait for more confirmation that growth in domestic demand is back on to a firm footing and that the US economy is not sliding into recession on the back of its mortgage crisis.

He said that waiting till the May meeting will also allow the Bank to look at the March quarter inflation data.

But since the speech on March 16 by Malcolm Edey, the bank’s Deputy Governor in charge of economics, the push has gathered force amongst commentators, analysts and others in favour of rate rise.

The speech didn’t say anything significant or new, just reminded the market that inflationary pressures were still evident and still evident at a worrying level and that the bank would be keeping a close eye.

It was a statement of the obvious but it was made with the intention of reining in expectations of an easier monetary policy this year and reminding the market not to get too far ahead ofreality.

His speech came as more information emerged confirming that the modest recovery in economic growth in the final quarter of 2006, was continuing in the early months of 2007 with solid retail sales, a glimmer of an upturn in building approvals and housing finance, solid growth in car sales and good profits reported in the interim reporting period.

Overseas the European lifted rates, as did the Chinese but the US seemingly changed focus from a single-minded concentration on inflation, to one that also mentioned other factors in the economy, such as the slumping housing sector and subprime mortgage problems.

Last week’s comments by Fed chairman, Ben Bernanke were also seen as both a continuation of the Fed’s new stance, and also ‘hawkish’ on inflation.

In fact it was more ‘jawboning’: no one seriously believes the Fed will lift interest rates when the US housing slump is deepening and we have yet to seen the full impact on new and existing home sales of the subprime problems.

And as analysts downgrade US and Australian housing industry forecasts consider these comments from Brickworks CEO, Lindsay Partridge, at a media briefing in Sydney yesterday.

Welcome to the bank reporting season.

Within a month, four of the Big Five banks will produce interim earnings while the Bank of Queensland trots out its figures in the middle of next week.

The ANZ, St George, National and Westpac will all produce solid profit performances in the first half of the 2007 financial year and analysts are generally agreed that the main points to be watched will be the level of bad and doubtful debts in housing mortgages and personal, such as credit cards.

And while there were fears there could be an upsurge in the level of dodgy loans and actual losses, it is now becoming clear from the APRA and Reserve Bank data, plus the RBA’s financial stability statement on Monday that much of that concern was misplaced.

In fact the RBA’s comments on the banks and the banking system should be read by all bank shareholders: unless the RBA has made a horrible error, it’s clear there are no black holes in bank balance sheets.

Perhaps the most interesting area to watch is the implicit warning about the contraction of lending margins on housing mortgages because of low demand and high levels of competition.

The RBA points out that there are hardly any mortgages being sold where the borrower is paying the bank headline adjustable or fixed rate, such is the intensity of competition.

Banks’ share prices have increased by around 14 per cent over the past six months, slightly underperforming the broader market. The market has been driven more by one off situations involving private equity (Qantas and Coles) and lately, the recovery in commodity prices.

The RBA said on Monday that market-based measures of credit risk also remain benign, with bank bond spreads remaining low by the standards of recent years, and the premiums on credit default swaps – both senior and subordinated – falling further over the past six months.

“In the financial sector, both the banking and insurance sectors continue to record high rates of return on equity, benefiting from continued balance sheet expansion, low levels of non-performing loans and the strong performance of equity markets.

“While there has been robust competition in lending to households for a number of years, recently there has also been a noticeable pick-up in competition for business lending, with margins under downward pressure and an easing of lending conditions.

“As has been the case for some time, the challenge for financial institutions is how best to measure, and price for, risk in an economy that is now in its 16th year of expansion

“Bank business credit grew by 17 per cent over the year to January, up slightly from 16 per cent over the preceding year, and faster than the 11 per cent growth in banks’ on-balance sheet housing credit.

“Growth has been particularly strong in large loans, including syndicated facilities where a number of lenders each finance a portion of the total amount.

“Nearly $100 billion of such facilities were approved last year, 38 per cent higher than in 2005, with around one quarter of these used to finance mergers and acquisitions, compared to an average of 15 per cent over the period since the early 1990s.

“Competition also remains intense in the housing loan market, which, over recent years, has been associated with some notable changes in lending practices.

“As discussed at some length in previous Reviews, these include: an increase in permissible debt-servicing and loan-to-valuation ratios; the use of alternative property valuation techniques; an increased reliance on brokers to originate loans; and the wider availability of ‘low doc’ loans.

“More recently, it appears that many lenders have attempted to maintain strong growth in their mortgage portfolios at the same time as the demand for housing finance has moderated from its peaks in 2003.

“This competition is evident in the contraction of margins on variable-rate housing loans, with the vast majority of new borrowers now paying an interest rate less than the major banks’ standard variable home loan indicator rate.

“The average interest rate paid by new borrowers was around 60 basis points below the standard variable rate as of mid 2006, compared to an average discount of around 45 basis points two years earlier, and around 20 basis points in the mid 1990s. Consistent with a large proportion of housing loans having been taken out in recent years, the average discount on outstanding loans has increased to around 40 basis points.

“With refinancing accounting for over one quarter of new housing loan approvals over the past two years, it seems likely that average housing loan margins will continue to contract, even if the size of the discount on new loans stabilises.

“It appears that competition has also picked up around fixed-rate housing lending, as some lenders have responded to increased demand for these products. In late 2006, fixed rate loans accounted for around 20 per cent of owner-occupier loan approvals, well above the average of around 10 per cent since 2000.

“At the same time, the margin on fixed rate loans has narrowed slightly, with the 3-year fixed indicator rate increasing by less than the 3-year swap rate over the past year.

“The narrowing of housing loan margins has been particularly pronounced in the low-doc segment of the mortgage market. These loans involve a large element of self-verification in the application process and are designed mainly for the self-employed or those with irregular incomes who do not have the documentation required to obtain a conventional mortgage.

“The interest rate paid on new low-doc loans was, on average, around 20 basis points below the major banks’ standard variable indicator rate in mid 2006, compared to 50 basis points higher than the standard variable rate two years earlier.

“This is equivalent to 45 basis points above the actual rate paid on new full-doc

A decade after the great Asian crisis was born, grew and left no country untouched; the region is the engine room of the world economy.

The continuing rebound in economic activity might produce another rise in interest rates a week today but it’s also having a positive impact on the states with growth and activity switching away from the resource boom areas of WA, Queensland and the Northern Territory.

At the same time figures yesterday from the Housing Industry Association showed an improvement in new home sales in February, but they also confirmed just how depressed the new homes market really was.

The HIA said a recovery in NSW pushed new home sales up 2.9 per cent in the month as buyers took advantage of stable interest rates.

New home sales totalled 8,193 dwellings, according to the HIA which said sales in NSW rose almost 17 per cent from January.

Sales of private ‘detached’ houses rose by 3.9 per cent, while sales of units fell by 4.2 per cent, the HIA said.

Western Australia had the second-fastest rise in sales volume with an increase of 11.2, while sales fell 3.4 per cent in Queensland.

But the apparent good news was just that: apparent.

February’s sales volumes were 5.2 per cent lower compared with February 2006 while in NSW sales in three months to the end of February were 21 per cent down on the figure for the three months to February 2006.

So housing still has a way to go to recover, especially in NSW but a rate rise next week would be the last thing the industry would want.

But according to the National Australia Bank the so called two speed economy is starting to disappear with the slower south eastern states picking up momentum.

In its latest look at the states the NAB said that the minerals and energy boom (again, while still present) was starting to lose impetus and the resource-rich areas (WA, NT, Qld) are no longer being pump-primed to the same degree.

“Moreover, the benefits of the boom have partly flowed to the South-East (of the continent) through various mechanisms – in particular, fiscal stimulus and equity prices.

“Government revenue has increased and the benefits partly reinvested in the South-East and seen lower personal income taxes.

“The business and financial services industry, which is primarily based in the South-East, has been given a fillip with strong corporate profitability, takeover activity and high equity markets – all partly resulting from the boom.

“Manufacturing and other services (NSW, Victoria, SA) continue to expand at a slower pace, due to lower returns and, to a lesser extent, lost competitiveness to China and others.

According to the Reserve Bank, Australians appear to have their finances in good order, the banks have low levels of problem loans while, as we know, the economy is going very well.

The Australian dollar closed over the 80 USc mark on Friday; another first as it was the first time it ended a trading week above the 80 US cent mark for a decade or so.

If you look at the performance of leading commodities last week then you’d be mistaken for believing that the Fed didn’t change policy last week on interest rates and inflation.

Gold was up, then down on Friday as US house sales rose more sharply than expected in February as prices fell.

Oil eased, and then rose on a combination of factors such as the level of US stocks of petroleum products and then geopolitical worries around Iran.

Nickel rose then fell as the first real flood of metal into stockpiles appeared mid week.

Copper rose, rose and rose and then eased a touch on Friday as demand from China continued to dominate thinking in the market.

And corn and wheat futures prices eased on Friday ahead of the release this week of the first estimate of the 2007 US grain plantings from the US Department of Agriculture (USDA).

Overall the Fed’s significant policy switch was seemingly forgotten, but will be remembered again this week with a far number of important indicators due for release in the US.

But with demand from China dominating so many markets, attention is elsewhere.

For example copper rose the third week in row, with prices reaching their highest levels since December.

Stocks held by the London Metal Exchange fell for sixth week in a row last week thanks especially to imports by China, the biggest user of the metal.

China’s demand continues to underpin the market as it soaks up metal to replace the rundown in copper stocks late last year when prices rebounded after the mid year slump.

China used its own stocks to avoid paying very high prices for the metal but has now been forced back into the market to replenish its position, thereby driving up prices once again.

May Comex copper futures ended at $US 3.069 a lb after touching $US3.133, the highest price since mid-December. Copper prices gained 1.9 per cent last week after jumping 12 per cent over the previous fortnight.

Copper prices have gained 29 per cent in the past year.

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Nickel suffered its biggest fall in more than six months as LME stocks continued to grow.

The metal has surged 27 per cent so far in 2007 to a succession of records and there are now suggestions that this may be forcing users to slow their purchases.

But stocks are low, even after the latest increase and all it could take is for one buyer to aggressively bid for metal on any day and prices could jump again.

The LME stocks rose 14 per cent on Friday to 4,932 metric tons, taking the week’s increase to 38 percent.

But that was after an 85 per cent fall in stocks over the past year. The actual amount of nickel in stock is still small, an estimated two days global consumption at best.

LME nickel prices fell 6.5 per cent on Friday and more than 12 per cent over the week because of the sharp rise in stocks from less than a day’s supply to around two days. Prices had surged 10 per cent the week before.

Helping drive the fall was a 36 per cent rise late last week in the amount margin traders have to put up for each six tonne lot traded on the LME.

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Gold surprised with a sharp fall on Friday after looking set for further gains for most of the week.

It was the first fall in seven trading days for gold and came despite a rise in oil prices and tension in the Middle East.

The sharp rise in US home sales in February was blamed, but most traders said there were some solid profits to be had and they were taken.

April gold fell $US6.90 to $US 657.30 on Comex in New York, after rising around $US21 an ounce over the previous six trading days.

Oil prices finished 59USc higher at $US62.28 a barrel.

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And wheat, corn and soybean futures were all lower ahead of the important crop planting report from the USDA this week.

There has been growing speculation that the sharp rise in corn prices over the past year, mostly driven by demand from the ethanol industry, would result in the largest corn plantings in US history.

The fear is that this in turn will cut plantings of wheat and soybeans by US farmers.

Futures markets are all nervy about the result, especially with Brazil reporting good crops and rain returning to many of the drought areas of Australia in the past month or so.

For the first time in three years there’s a rising sense of optimism about the outlook for the Australian wine industry.

Is the Australian healthcare sector about to undergo another bout of takeover speculation?

So the Australian dollar is hovering above, at or just under the 80 US cent level, depending on the time of day in the trading cycle.

It finished above 80 USc Tuesday night and started trading around that level here today.

It’s risen to what is about its highest level in 10 years and analysts are all saying it was as a result of the low key warning on Friday by the Reserve Bank’s Deputy Governor, Malcolm Edey that some of the factors which pushed up inflation were still evident and still a concern.

Mr Edey is the RBA’s chief economist: he is the Deputy Governor, economic, and that probably makes him almost as influential as the Guv, Glenn Stevens.

That’s why his words last week were important where as a similar speech at the start of the month was not taken as seriously because they didn’t include phrases used on Friday.

This is the key phrase: “This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too lower in the period we can foresee”.

It’s called jawboning, a word I’ve used many times to describe speeches by key officials in the US and here. Edey’s speech was no different.

Although it was a statement of the obvious to some in Australia, it also came as traders in the US started wondering if there was a chance of rates being cut this year, rather than left on hold.

Even though some looked at US producer and consumer price indexes last week as suggesting that inflation was returning (albeit in a small way), others looked through the figures, factored out volatile oil and food prices and said no way.

Then there’s the US housing slump and the problems in the subprime and lower levels of the prime mortgage markets which show no signs of improving. This week sees a number of key figures for the housing industry and the betting is that the problems still have a way to go before things get better.

Uranium bulls are snorting and stamping the ground as world prices rise towards the $US100 a pound level.

Just when we were basking in the strength of the economy, along comes someone to remind us of the need for a dark cloud or three.