Car Sales Down

Car sales figures have been released showing a drop of 3.2 per cent in March. In trend terms car sales fell by 20.2 per cent when compared with a year earlier – the weakest annual growth rate since records were maintained 14 years ago. Sales of passenger cars and sports utility vehicles were weaker however “other” vehicles (including utes, vans, trucks and buses) rose by 3.1 per cent in March, courtesy of the possible 30 per cent tax deduction on business investment.

A MIXED MESSAGE FROM INFLATION - The Consumer Price Index (CPI) - rose by 0.1 per cent in the March quarter and by 2.5 per cent over the past year. Inflation is now back in the Reserve Bank's 2-3 per cent target band. The underlying or core rate however, surprised by not being so accommodating. This rose 1.1% in the quarter which was above expectations of .75% up. This reduces slightly expectations for an easing next month but the likelihood of reductions in the underlying rate over 2009 will keep further easings on the agenda.

The IMF continued with the gloomy statistics coming out of international bodies. They've predicted the Australian economy will shrink by 1.4% this year - close to the -1.7% of 1990 - 91. They expect the global economy to slump by 1.3% (almost 2% lower than their January forecast of +0.5%) this year before turning positive next year at 1.9%

There was a bit of activity yesterday to report on. Firstly, the broad measure of business inflation - the producer price index (PPI) - fell by 0.4 per cent in the March quarter - the first fall in 6 years. A 25 per cent fall in the oil price drove the weaker result. Construction costs fell by 1.5 per cent in the March quarter - the biggest fall in records going back over 12 years. Prices of manufacturing goods fell by 8.1 per cent in the March quarter, the biggest fall in 40 years (reflecting lower oil and base metal prices).

Secondly, the RBA Board minutes were released where they acknowledged that " the latest set of indicators suggested that GDP was likely to have fallen again in the March quarter" thereby placing us in a technical recession. They indicated that while near term growth would be soft there was a raft of positive trends including tentative signs of a global economic recovery. Given the significant amount of stimulus in the pipeline they decided to go for just 25bp. The language at the end of the statement seemed to me that they may want to wait and see for the moment and may not ease in May. A lot seems to be happening very quickly however and their tune may change by then.

Link to minutes http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2009/rba_board_min_07042009.html

Thirdly, the Governor of the RBA spoke yesterday and it's been widely reported that he used the 'R' word in relation to Australia in the opening section of his speech. Basically he was alluding to the severity of the global recession and the fact there was no way we could escape it. Our future is dependent on confidence and much of the speech was devoted to instilling this:

"The first thing is to maintain some confidence in ourselves and the prospects for our country over time. We cannot achieve effortless prosperity either on the back of ever‑escalating mineral prices or simply by bidding up the prices of our houses. It is as well to realise that. But as I have said on previous occasions, Australia’s genuine
long‑term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.”

Link to the speech: http://www.rba.gov.au/Speeches/2009/sp_gov_210409.html

The Westpac Leading Index fell for the sixth consecutive month in February to bring the annual pace of decline to -5.1%, the worst since 1982. Westpac chief economist Bill Evans said the rate of contraction is "truly remarkable", adding that the index signals "the Australian economy will enter a recession." If the RBA pauses their rate cuts it could be tactical to boost confidence. "We expect the bank will see the need to have ample capacity to be cutting rates through the second half of 2009…The economic case for cutting rates is undeniable," Evans said.

Scary stuff. At least our banks are looking pretty solid. Data released by the RBA yesterday show bank balance sheets are in a very healthy state. While impaired assets or bad loans rose by $6.7 billion in the December quarter, total assets rose at a far faster rate - up $130.6 billion in the quarter or almost 5.2 per cent. The impaired assets (bad loans) ratio rose from 0.52 per cent to 0.74 per cent in the December quarter - a decade high but still well below levels reached following the last recession.

On a positive note, if you can call it that, - in Beijing this month the ratio of blue-sky days has gone back to the levels of late last year, as factories reopen and the once-ubiquitous Beijing smog returns.The Beijing authorities classify a blue-sky day as one where its Air Pollution Index is below 50. There are also a range of other indicators including car and real estate sales, air travel, industrial production which suggest momentum is returning to the underlying Chinese economy. This will obviously be good for our mining sector.

Cash At 2% ?

This morning the RBA Head of Financial Stability spoke on the "Global Financial Crisis: Causes, Consequences and Countermeasures". If you're interested in finding out how we got into this mess please follow this link http://www.rba.gov.au/Speeches/2009/sp_so_150409.html.

Yesterday the NAB Monthly Business Survey showed conditions were marginally better but still at recessionary levels. Employment is the key area of weakness. They expect negative growth for the first quarter, -1% for 2009, just under 1% for 2010, unemployment to rise to 7 3/4 late 2009. Risks to activity and rates are still to the downside and their expectations are for the RBA to continue 25 point cuts to 2% in late 2009 as growth and employment deteriorate.

NSW Employment Looking Bad

Just as a reminder of where we left off prior to Easter - employment figures came out on Thursday showing we still have a little way to go - particularly in NSW where jobs are being lost at the rate of 500 a day.

Unemployment jumped from 5.2% to 5.7% on its way to most likely surpassing recent forecast highs of 7%. In NSW it's 6.9%. 34,700 people lost their jobs in March in Australia but almost half were in NSW. Excluding NSW the unemployment rate stands at 5.2%

Flat to Positive Yield Curve

As you know, the RBA dropped the cash rate to 3.00% yesterday. The yield curve is now very flat to upward sloping. Rates for all maturities are a little higher than yesterday as the market had priced in the possibility that the RBA may move 50 points. The longer end of the yield curve (4 - 5 years) moved up around 15 points as they begin to price in the inevitable return of inflation and lifting of short term rates. It's unlikely that further easings will cause the longer end of the curve to drop down unless evidence suggests further deterioration in world growth thus delaying any recovery. A further steepening of the yield curve from here will indicate a stronger conviction that growth is returning. My feeling however is any steepening in the near term will be premature and may be an opportunity to lock in some good two and three year rates.

Job Ads Down

Job ad figures came out yesterday and it looks like job ads are using up a lot less internet and paper. The Oliver internet job index fell 12.5% in March to be down 44.8% a year ago,. The ANZ index of newspaper and internet job ads fell by 8.5% in March. While it may take longer to find a job at least it will take less time looking for one.

Inflation is not a concern for the RBA at the moment as highlighted by the TD Securities / Melbourne Inst. inflation gauge which fell by 0.1% per month to be currently up 2.6% over the year.

Economists are in two minds as to an easing today. Some suggest the RBA may wait to see how the stimulus packages impact and then ease. My view is if they're likely to ease at some stage they should do it early before things deteriorate further. I'd like to see 50 points today but I may be forced to wait.

G 20 Leaps In

It has been a very busy week culminating in the G20 throwing another trillion dollar package at the financial crisis; trillion dollar packages are certainly in vogue at the moment. The IMF is a major recipient this time giving them a larger pot of money to bail out struggling economies, particularly those of developing nations. There were a raft of other measures too but what worries me is that it takes time for these measures to be implemented and in the meantime people are being laid off at an alarming rate. Further, insolvency firm PKF predicts that more than one in every six companies could fail by the time the recession reaches its peak - and many of those will be in the next few months.

Uncertainty as to the picture coming out of the States can be clarified by asking any one of the extra 633,000 people who lost their jobs in March. The unemployment rate has now hit a 25-year high of 8.5%. Expectations are that labour-market conditions will continue to deteriorate as job losses fuel further contractions in spending which in turn fuel further contractions in employment.

In other developments during the week both the OECD and World Bank came out with negative growth forecasts (-2.7% and -0.6% respectively) to coincide with the G20 and the Deputy governor of the RBA conceded that growth this year was likely to be negative - effectively declaring the Australian Economy to be in recession.

While retail spending slipped back 2% during the month there was a little light coming from solid dwelling approval numbers - up 7.8% in February, the biggest gain in 10 months with a 31.5% surge in apartment approvals. The hope is now that building activity could drive our economy forward.

We’ll know Tuesday afternoon but the easing call is now a little more lineball. I’m leaning very much towards there being another easing but the upward sloping shape of the longer part of the yield curve gives me cause to pause. The market is starting to price in the return of growth and inflation.