NAB have brought forward expectations for the next rates hike (attached). I should point out that they had forecast rates to drop to 2% by the end of the year. Personally I think we really need to look at the data over the next two months to see if the economy can hold up post the stimulus packages. Having said that the housing auction clearance rates were very strong on the weekend with nearly 72% of residential properties sold in Sydney compared to 46% this time last year. The RBA is well aware that if growth takes off with cash at 3% the housing sector will explode. In the low rate environment post 1987 housing prices doubled in the space of a year.
The RBA are likely to keep cash rates unchanged when they meet this week.
This morning ANZ has reported a slowdown in the rate of increase of its bad debts - the majority of its bad debts come from New Zealand. It also looks like it's on track to match its 2008 cash profit of $3.3bln.
August 31, 2009
August 19, 2009
The RBA Board Minutes
The RBA released the minutes from their August 4 meeting yesterday. These minutes and recent statements have moved the focus away from whether there will be another easing to the timing of the next tightening. I've pasted the concluding three paragraphs below which suggest to me that the RBA will need to wait at least another two to three months before they can get a good handle on where the economy is at. Crucial will be observing how the economy performs now that the crutch of various stimulus packages has been removed.
Members noted that the cash rate had been reduced to the current very low level in anticipation of very weak economic outcomes. In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.
In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely. A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.
Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead.
This morning Assistant Governor Malcolm Edey acknowledged in a speech that there will be an increase in loan defaults in coming months in Australia but that they are unlikely to reach heights experienced in other parts of the world.
Members noted that the cash rate had been reduced to the current very low level in anticipation of very weak economic outcomes. In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.
In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely. A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.
Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead.
This morning Assistant Governor Malcolm Edey acknowledged in a speech that there will be an increase in loan defaults in coming months in Australia but that they are unlikely to reach heights experienced in other parts of the world.
August 18, 2009
Exuberance Running Out Of Steam?
The Shanghai Composite Index has suffered a couple of weeks of steep declines (off 10% in the last month). It's broken through a major support level and could continue to drop further (it has risen dramatically this year however so a correction is no surprise). I mention it as so much of our escape from recession is due to the strength of China who recently became our largest trading partner. This drop in Shanghai has caused a drop in commodity prices and, among other things, a subsequent drop in the US and Australian stock markets. Ours and the global economy is still very fragile and we should all be cognisant that the recent exuberance could turn very quickly. Treasury Secretary Ken Henry made this point very clearly yesterday:
''The Australian economy does look, certainly relative to the rest of the world, very resilient,'' he said. ''But the rest of the world is not out of the woods yet. It is possible that there will be a second shockwave. I have no reason to believe it will be anything like the first shockwave, but there could be a second shockwave.
''That would have implications for future growth. So I think we should be a little cautious about rushing to declare victory just yet.''
Ironically all this talk in the papers about cash rates going up by 2% could scare people into shutting their wallets and delay the rate rises. Sentiment and confidence, as i've mentioned before have a powerful impact on economic activity.
Longer rates have consequently strengthened considerably this morning - 15 points or so around the 3 year mark
''The Australian economy does look, certainly relative to the rest of the world, very resilient,'' he said. ''But the rest of the world is not out of the woods yet. It is possible that there will be a second shockwave. I have no reason to believe it will be anything like the first shockwave, but there could be a second shockwave.
''That would have implications for future growth. So I think we should be a little cautious about rushing to declare victory just yet.''
Ironically all this talk in the papers about cash rates going up by 2% could scare people into shutting their wallets and delay the rate rises. Sentiment and confidence, as i've mentioned before have a powerful impact on economic activity.
Longer rates have consequently strengthened considerably this morning - 15 points or so around the 3 year mark
August 14, 2009
Governor's Opening Statement to House of Representatives Committee
Glenn Stevens was speaking to parliament this morning and a link to the text of the speech is below.
The sense I get from it is that he is preparing us for a tightening. Of note is the following paragraph:
In fact, that is probably a reasonable characterisation of this downturn in general. On the
basis of the information to hand at present, this may well turn out to be one of the shallower
recessions Australia has experienced.
If this is the case Mr Stephens, when there is enough data to justify it, will want to remove the extreme stimulatory impact a 3% cash rate can have and move cash to a more neutral stance. I'm beginning to concede that a tightening before year end is a slim possibility. Ironically the fact that he's talking about cash rates going up could slow spending and therefore delay any upward move.
http://www.rba.gov.au/Speeches/2009/sp-gov-140809.pdf
The sense I get from it is that he is preparing us for a tightening. Of note is the following paragraph:
In fact, that is probably a reasonable characterisation of this downturn in general. On the
basis of the information to hand at present, this may well turn out to be one of the shallower
recessions Australia has experienced.
If this is the case Mr Stephens, when there is enough data to justify it, will want to remove the extreme stimulatory impact a 3% cash rate can have and move cash to a more neutral stance. I'm beginning to concede that a tightening before year end is a slim possibility. Ironically the fact that he's talking about cash rates going up could slow spending and therefore delay any upward move.
http://www.rba.gov.au/Speeches/2009/sp-gov-140809.pdf
August 12, 2009
NAB Increase Forecasts on Back of Business Survey
Business Conditions have turned positive recording the strongest reading since May 2008. The index improved 3 points to +1 in July. Business Conditions are therefore 6 points above a year ago and 12 points over the level 6 months ago. Importantly confidence is also strong with a 6 point improvement to +10 - the best outcome since Aug 07.
From the NAB Summary:
* Survey suggests domestic demand started Q3 with considerable momentum
(near trend growth).
* Global forecasts for 2009 unchanged at -1½% – with more signs of stabilisation emerging. While the worst has passed for activity, unemployment will continue to rise with subdued growth in 2010.
* We have increased our domestic GDP forecasts for 2009 to zero per cent (from -½%) and 1.2% in 2010. That largely reflects current strength as per the Survey. But we still see some of the current strength as temporary and expect flat to falling growth in H2.
* Unemployment to rise to 7.3% in 2010.
* Wage pressures, purchase costs and general prices ease further – but retail price inflation lagging.
* RBA on hold – with neutral bias - for some time, then up from early (Feb) 2010. Data on activity & unemployment critical. Better results could see tightening cycle brought forward to late 2009.
From the NAB Summary:
* Survey suggests domestic demand started Q3 with considerable momentum
(near trend growth).
* Global forecasts for 2009 unchanged at -1½% – with more signs of stabilisation emerging. While the worst has passed for activity, unemployment will continue to rise with subdued growth in 2010.
* We have increased our domestic GDP forecasts for 2009 to zero per cent (from -½%) and 1.2% in 2010. That largely reflects current strength as per the Survey. But we still see some of the current strength as temporary and expect flat to falling growth in H2.
* Unemployment to rise to 7.3% in 2010.
* Wage pressures, purchase costs and general prices ease further – but retail price inflation lagging.
* RBA on hold – with neutral bias - for some time, then up from early (Feb) 2010. Data on activity & unemployment critical. Better results could see tightening cycle brought forward to late 2009.
August 11, 2009
Housing Finance
Housing finance figures released yesterday showed that it;s still chugging along with a seasonally adjusted increase of 1.1% in June. This is the ninth straight month it has increased. In May the increase was 2.2%
The percentage of first home buyers reduced a little however from 28.5% to 27.1%. Investment lending fell 1.8% after a 2.4% increase in May. A lot of first home buyer borrowing has been brought forward due to the first home buyer grant, which gets cut in half in Sept, so this drop off could continue into the latter months of this year.
NAB Qtly Business Survey for July is due out today.
The percentage of first home buyers reduced a little however from 28.5% to 27.1%. Investment lending fell 1.8% after a 2.4% increase in May. A lot of first home buyer borrowing has been brought forward due to the first home buyer grant, which gets cut in half in Sept, so this drop off could continue into the latter months of this year.
NAB Qtly Business Survey for July is due out today.
August 10, 2009
Last Week
There were a couple of interesting developments last week:
EMPLOYMENT
The labour market continues to show great resilience. Although there were 16,000 less in full time employment in July there were 48,200 more people in part time employment meaning the headline rate hung in at 5.8%. In the year to July the economy shed 189,000 full-time jobs which were replaced by 190,700 part-time positions. Aggregate hours worked (new measure) dropped 0.4% in July and 2.9% from a year earlier. Compared to 1990's there had been as quicker and deeper reduction in hrs worked this time as employers have reduced hours rather than axing staff.
The impact will be a reduced level of household income placing a drag on the speed of any recovery.
RBA STATEMENT ON MONETARY POLICY
Much has been reported in the paper about the RBA's significant adjustment to their outlook for the future. Wholesale rates have continued to sell off this morning as the market tries to second guess when the next tightening will be and how quickly subsequent tightenings will follow. The concluding paragraph is always an important one to scrutinise:
"Given the rapidly evolving financial and economic landscape globally, the outlook for the Australian economy continues to be subject to considerable uncertainty, although the risks are more balanced than they have been for some time. With confidence globally still fragile, it remains possible that the outlook could again weaken. On the other hand, with the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge. For the time being though, the Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. Over the period ahead, the Board will continue to monitor economic and financial conditions and how they affect prospects for a sustained recovery in the domestic economy, consistent with achieving the inflation target."
The RBA therefore will want to move to a more neutral stance (around 4%- 4.5%) quickly once it is sure the economy can sustain such a move. It acknowledges this could still be some time away. 90-day futures are pricing a 90 -day bank bill from December this year at 3.87%. Time will tell is the market is correct but personally I think it's a little ahead of itself.
Having said that the sell off could continue for the time-being. 1 - 3 year rates are about 15 points higher than Friday morning.
EMPLOYMENT
The labour market continues to show great resilience. Although there were 16,000 less in full time employment in July there were 48,200 more people in part time employment meaning the headline rate hung in at 5.8%. In the year to July the economy shed 189,000 full-time jobs which were replaced by 190,700 part-time positions. Aggregate hours worked (new measure) dropped 0.4% in July and 2.9% from a year earlier. Compared to 1990's there had been as quicker and deeper reduction in hrs worked this time as employers have reduced hours rather than axing staff.
The impact will be a reduced level of household income placing a drag on the speed of any recovery.
RBA STATEMENT ON MONETARY POLICY
Much has been reported in the paper about the RBA's significant adjustment to their outlook for the future. Wholesale rates have continued to sell off this morning as the market tries to second guess when the next tightening will be and how quickly subsequent tightenings will follow. The concluding paragraph is always an important one to scrutinise:
"Given the rapidly evolving financial and economic landscape globally, the outlook for the Australian economy continues to be subject to considerable uncertainty, although the risks are more balanced than they have been for some time. With confidence globally still fragile, it remains possible that the outlook could again weaken. On the other hand, with the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge. For the time being though, the Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. Over the period ahead, the Board will continue to monitor economic and financial conditions and how they affect prospects for a sustained recovery in the domestic economy, consistent with achieving the inflation target."
The RBA therefore will want to move to a more neutral stance (around 4%- 4.5%) quickly once it is sure the economy can sustain such a move. It acknowledges this could still be some time away. 90-day futures are pricing a 90 -day bank bill from December this year at 3.87%. Time will tell is the market is correct but personally I think it's a little ahead of itself.
Having said that the sell off could continue for the time-being. 1 - 3 year rates are about 15 points higher than Friday morning.
August 05, 2009
RBA Board Meeting Rates Statement
"The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed."
The above sentence has been in the RBA statement accompanying the Board Meeting cash rate announcement for the last few months. It's absence in yesterdays statement sends a clear signal that the RBA does not anticipate the need for further easings. This does NOT however mean a tightening is imminent as globally 'conditions remain difficult'. Keep an eye on consumer sentiment and business investment levels.
Full statement: http://www.rba.gov.au/MediaReleases/2009/mr_09_16.html
Yields have consequently priced out any potential of downward movement in rates and have started pricing in the next move being up. There are varying opinions as to when that will be.
The above sentence has been in the RBA statement accompanying the Board Meeting cash rate announcement for the last few months. It's absence in yesterdays statement sends a clear signal that the RBA does not anticipate the need for further easings. This does NOT however mean a tightening is imminent as globally 'conditions remain difficult'. Keep an eye on consumer sentiment and business investment levels.
Full statement: http://www.rba.gov.au/MediaReleases/2009/mr_09_16.html
Yields have consequently priced out any potential of downward movement in rates and have started pricing in the next move being up. There are varying opinions as to when that will be.
August 04, 2009
Yield Curve
The yield curve has steepened considerably over the last week. To see a graphical representation have a look at it on my homepage www.curvesecurities.com.au - the steepest part is between 1 out to 3 years.
90 day bank bill futures have priced in tightenings pre Christmas. A 90 day bill in Dec is travelling at 3.70% personally I think it's a great opportunity to take advantage of an over enthusiastic sell-off in rates (ie take advantage of higher yields) but be aware that this sell off may continue for a few more days.
90 day bank bill futures have priced in tightenings pre Christmas. A 90 day bill in Dec is travelling at 3.70% personally I think it's a great opportunity to take advantage of an over enthusiastic sell-off in rates (ie take advantage of higher yields) but be aware that this sell off may continue for a few more days.
August 03, 2009
Last Week
The most important development last week was Glenn Steven's speech were he gave the clear impression that there won't be any more easings. One of the key reasons for this is the confidence and optimism - very powerful forces - evident in the economy. The NAB Qtly Business Survey backed this up during the week where business confidence moved closer to negative.
As a result yields have moved up during the week with the yield curve steepening as a move to monetary policy rate tightening is factored in for next year. Newspaper claims of rate rises by Christmas are just sensational in my opinion though as we still have some way to go. Despite the optimism the economy is still in a delicate state with increased unemployment and business closures likely during the year.
As a result yields have moved up during the week with the yield curve steepening as a move to monetary policy rate tightening is factored in for next year. Newspaper claims of rate rises by Christmas are just sensational in my opinion though as we still have some way to go. Despite the optimism the economy is still in a delicate state with increased unemployment and business closures likely during the year.
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