Recession / Cash Rates

Centrebet has the chances of Australia entering a recession at $1.76 and the chances of not at $1.95. The advantage these bookies have is that they are a little removed from the distorting influence of the financial markets and can look at the situation objectively. It's also a long term bet and acknowledges that we still have a long way to go.

Financial markets have their own agenda and so shouldn't always to looked to as an indication of where rates are going. In the long term markets are generally right but the futures markets in the short term are controlled by traders who are making bets on movements over the next day, week or month. We've seen significant movements up, across the yield curve over the last month. Traders have been trading the momentum by shorting futures and hoping to get out before the momentum ends and the direction changes. Given our real economic pain will show up in figures released in the latter half of this year at some point that momentum will change. It could even be today given 10 year futures have rallied 15 points 3 years and 90 day bill futures in December have rallied 10 points (at time of writing).

Ross Gittins from the SMH is a commentator I've respected for a great deal of time. I was explaining the above scenario to someone last week but Ross has a similar explanation in far more detail in today's paper - link below. It's well worth reading (mainly I guess as I agree with him and believe the easing cycle isn't finished)

http://business.smh.com.au/business/official-interest-rate-more-likely-to-fall-20090621-csmj.html?sssdmh=dm16.383146