The RBA’s meeting this Tuesday is unlikely to produce another rate hike, we got that when the commercial banks hiked following the November 2 meeting. In terms of market pricing, no economists expect the RBA to hike and futures have no chance of hike priced in and if anything, a very modest chance of a cut – don’t get excited about that though.
There is a lot of talk about the prospect of a more dovish RBA statement following the decision and while that’s always a possibility I’m not sure that the RBA or indeed the RBA board will be feeling that dovish.
You have to acknowledge, and I do, that it has been a good week for the bears (on the economy at least). At face value the retail figures and the soft GDP figures suggest the economy is slowing sharply and certainly some commentators believe just this. Nevertheless, and as I briefly discussed on the day, the headline GDP figure gives a misleading signal as the weakness was driven by base effects, statistical noise and producers underestimating growth (running down inventories).
Consequently I think it’s wrong to conclude from these figures that the economy is slowing sharply. Domestic demand growth (what consumers, business and government actually spend) is still robust, rising 0.6%q/q after 4 quarters of growth averaging 1% and annually, growth is an above trend 4.4%.
I mean it doesn’t make a lot of sense to conclude the Australian economy is slowing. Interest rates are only at average levels. They are not restrictive and I don’t think it’s accurate to suggest that the nation is straining under the weight of restrictive monetary policy. Moreover, jobs growth is very strong and the unemployment rate is very low. Note that we get another update on the labour market this Thursday (1130) and the median market expectation is that 20K (me at 15k) jobs were created. The unemployment rate is forecast to dip to 5.3%.
This, by the by, is one of the reasons I don’t think we can be confident of the signal the monthly retail numbers are giving – you don’t usually have a sluggish retailing sector when jobs growth is so strong. Don’t forget we have been here before, numerous times. Mid-year for instance, things were looking dire in the retail space, along comes an ABS revision and all of a sudden things weren’t so dire.
The opposite occurred this time round. Monthly retail sales were looking solid, along comes one weak month and some revisions, all of a sudden things look soft. My point is, you’re not going to get an accurate picture of the retailing environment when they are subject to such swings (something that it evident in the monthly retail components as well, swings have been huge). Nor are you going to get an accurate picture of the retailing environment from the retailing association. So think big picture, look at the whole canvass and you’ll be able to make a more precise assessment of where the Australian economy sits – and of course profit from any mispricing.
For instance, IBs look expensive for mine. Not even one rate hike is priced into the curve at this point (46% to June) and while I reckon future rate hikes will occur less frequently, I don’t quite think they’ll be that infrequent. I still think there will be 2 rate hikes in the first half, at this stage one each in Q1 and Q2, based largely on global growth prospects – which is why I think 10yrs look expensive as well.
Risk appetite is coming back, the global economy is much, much stronger in the 2H10 than had been projected and there is no sign of this material slowing that has been continually touted. 2011 will no doubt be more of the same – except much stronger. There is an extraordinary amount of policy stimulus globally and that doesn’t look like its going to change any time soon. Indeed the Bernank is apparently about to argue on 60 minutes (11am today Oz time) that he won’t rule out further quantitative easing. US data outside of that is reasonably light and includes initial jobless claims (Thursday), trade data and the Michigan consumer confidence survey (both Friday). The US government then plans to sell $66bn in coupons this week and monetise (this week alone) up to 1/3 of it by buying $15-$22bn worth of treasuries off itself and printing the money to do it.
In Europe , watch out for German factory orders (Tuesday), and then German trade data and industrial production on Wednesday. The UK has industrial production on Tuesday and the BoE meeting Thursday (no changes expected). Otherwise watch out for Chinese trade data on Friday and central bank meeting in Canada , NZ (Thursday morning at 7am) and South Korea (no changes expected).
Don’t forget ICAP’s charity day this Wednesday – dig deep, as all profits earned go toward helping those in need and as we know, good things happen to charitable people. So let’s be charitable!
Hope you have a great week…
The Reserve Bank of Australia has expressed guarded optimism for the future of Australian property financing in the midst of the continued global tightening of credit availability.
In his speech on Friday to the Queensland division of the Property Council of Australia, the RBA’s Deputy Governor Ric Battelino suggested that the home and commercial property finance markets show signs of life despite an overall slowing of credit growth.
Battelino stated that the Australian economy is growing around trend, while inflation remains within the RBA’s target range. “This is a comfortable position to be in,” Battelino said.
But in spite of the overall health of the economy, borrowers are still displaying caution, with credit growing at a moderate 7% over the past year and household savings on the rise. “All this is consistent with households taking a more cautious approach to their finances,” Battelino said.
According to Battelino, most of the growth in credit since 2005 has been due to households borrowing for housing, while credit card debt, personal loans and margin loans have remained fairly flat.
Addressing the home loan market, Battelino indicated the weakening of other areas of borrowing is not cause for concern for the RBA given the relative health of housing lending. “The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt,” he said. “From the Reserve Bank’s perspective, this seems to be a satisfactory state of affairs.”