RBA - Housing

There was a talk yesterday by an RBA officer where he discussed housing and housing affordability. It was academic and analytical in it's content rather than providing any clues as to the economy or interest rates.

Something that's important to be aware of though is that there is a battle within the RBA as to whether monetary policy should be used to control asset prices such as housing or not. On one side the argument is monetary policy should focus on inflation rather than the assets of a particular sector. The other side argue that monetary policy should be used to impact on the asset prices of that sector before a bubble is created. While the RBA won't say it they have used monetary policy to impact on housing prices in the past - early / mid 90s for instance. Glenn Stevens has not weighed into this battle but he no doubt has his eye on house prices and if they start to take off I expect they will tighten soon after.

RBA Speech to Senate - Press

Reading the AFR this morning I came across a couple of interesting quotes from Glenn Stevens, no doubt in reply to some of the questions he was asked by the Senate as they weren't in his speech.

"The more important issue will be for the joint support being given by both fiscal and monetary policy to be withdrawn in a timely fashion as the recovery proceeds - not too soon because we don't want to abort the recovery, but not too late as we don't want to overheat it"

The paper went on to say "He said there was a risk of fuelling inflation by leaving fiscal and monetary policy too loose, but that was some time away"

That implies to me, despite the upward move in rates since yesterday, that there is very little chance of a tightening in October and a slim chance of a tightening prior to Christmas. Retail sales figures tomorrow will start to paint a clearer picture.

Reserve Bank Governor Addresses Senate

Glenn Stevens made a statement to the Senate today in relation to the government's economic stimulus. There is nothing particularly revealing but more detail may be provided in the Q&A. Please find a link to it below and a couple of concluding paragraphs that relate to monetary policy. The statements clearly imply that they want to be pre-emptive to keep a lid on inflation if it looks like returning. I still don't think an October tightening is likely however as they need evidence that the economy can hold up with the stimulus dissipating.

http://www.rba.gov.au/Speeches/2009/sp-gov-280909.pdf

On the monetary side, the inflation targeting framework the Reserve Bank has been
following for a decade and a half will guide adjustments to interest rates. These will
be timely and ahead of a build-up of imbalances that would occur if interest rates
were kept low for too long.

These frameworks will, in other words, prompt the needed adjustments. It was the
preparedness to make those adjustments in the past, guided by these very
frameworks, that contained the build-up of imbalances in the upswing and which in
turn earned us the scope to take bold measures to support demand when a recession
loomed. A continuation of that approach into the future will serve us well.

First Home Buyers Last Minute Rush

New home sales soared in August to a new high as a wave of first home buyers rushed into the market (NSW struggling though).

Nationally, new home sales jumped 11.4 per cent in August, from a 0.1 per cent rise in July. First time buyers are taking advantage of the Federal Government's $21,000 first-home buyer grant boost before it is reduced at the end of the month.

After September new home sales could fall into a slump and the RBA will be keeping an eye on this market to see if it can hold up post-stimulus. The need to see clear evidence that the economy is growing without fiscal help will keep the RBA on the sidelines next month I believe.

Impaired Assets

I have mentioned before that there are generally two phases in times of economic difficulty. The first where high profile businesses that have flown too close to the sun stall and collapse and the second phase where middle sized corporations start to struggle. Figures released by APRA yesterday through the RBA bulletin indicate that problem loans are creeping up. Impaired assets, as at the June qtr, are at their worst point for the GFC.

New impaired assets in the June qtr stood at $10.8 bln which is more than a third higher than the average level of new impaired assets for each of the three preceding quarters.

Loan write-offs by banks during the June 2009 quarter were the highest since the GFC commenced at $2.6 bln which is up from the average of the last three quarters.

RBA Monetary Policy meeting Minutes

The RBA released the minutes from their last meeting to discuss monetary policy yesterday. The three pages give a good insight to their take on the global and domestic economy at present. The text can be found at the following link:

http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2009/rba-board-min-01092009.html

I've pasted below what I found to be a couple of key paragraphs;

Considerations for Monetary Policy
The information presented to members showed that the situation in the global economy was continuing to improve. Of most significance to Australia, the Asian region had recorded strong growth in the June quarter. While this had been largely driven by domestic demand in these economies, reflecting strong economic stimulus, there were also recent signs of a pick-up in their exports. Outside Asia, most economies had experienced another fall in GDP in the June quarter, though more recent information suggested that the majority of these economies were now approaching a turning point.
An important question for members was whether the global economic improvement would be sustained, or whether it was mainly a reflection of the strong macroeconomic stimulus that had been applied over the past year and might in due course fade. Members were also conscious that, even though financial market conditions had improved significantly and debt markets were beginning to function again, banks, corporates and households in many countries still faced significant balance sheet adjustments. This too could serve to limit growth.
Members concluded on balance that the global economy was most likely on a sustained, if modest, recovery path, though it was still too soon to be confident of this assessment.
On the domestic economy they noted that credit tightness and increase in market interest rates may put a brake on the economy and that wages growth was subdued meaning it wasn't threatening inflation. Underlying inflation was acknowledged however as still being quite high so any growth returning that put pressure on inflation would be met with a rise in the cash rate.

Employment

Yesterday employment figures were released showing a drop in total employed of 27,100 in August compared to a rise of 33,600 in July. This was worse than the expectation of a drop of 15,000. Full-time jobs fell by 30,800 and there were 3800 more part-time jobs following a strong rise in July. Hours worked during the month were also down.

The reason the headline rate remained the same at 5.8% was because the participation rate (total number of people actively looking for work) went down to 65.1% from 65.3%. So, despite the headline unemployment rate remaining the same these figures are not that great. Another factor that will cause the RBA to continue its deliberations about a rate hike. Put in the context of the level drop in employment since the GFC started and where many expected employment to get to it's not too bad either.

Retail Sales

Retail sales dropped by 1 per cent in July to $19.6 billion from $19.8 billion in June, when they fell a revised 0.8 per cent, seasonally adjusted. Analysts had expected sales would increase 0.5 per cent in July. The RBA will be keeping a close eye on statistics which indicate the resilience of the economy in the absence of government cash handouts. With numbers like this the RBA may have to wait longer, for more conclusive evidence, before raising rates.

Contrary to these numbers however a Westpac survey showed consumer confidence surging to a 2-year high.

The RBA will also have to throw into the mix statistics showing home lending easing after nine months of growth

NAB Monthly Business Survey - August 2009

The NAB Business Survey for the month of August showed that business confidence is surging. It's risen to it's highest level since Oct 2003. The thing about confidence is that it's emotive and relative. In relation to the end of last year I'm sure businesses are very confident but I find it hard to believe increased confidence levels compared to say 2005/6.

The Business Conditions index however is less about emotion and also returned a very positive result indicating an improvement in trading and profitability - particularly in areas that have benefited from various government stimulus packages.

If you wish to view a copy please email us at yield@curvesecurities.com.au

ANZ Job Ads

The number of job ads rose for the first time since April 2008 - a positive indication that businesses are starting to gear up for the recovery. The number of job ads increased by 4.1% in August . This shouldn't overshadow the fact however that job ads are still 48% lower than what they were a year ago.

US Payrolls / Stimulus to Remain

US Payrolls
US payroll figures came out on Friday showing the smallest monthly cut in jobs since Aug 2008. This is reasonably positive as the trend seems to show a slowing in the rate of job shedding. The headline unemployment rate however hit a 26-year high of 9.7%

Stimulus Packages
The G-20 have agreed that stimulus packages must remain in place until the global economy shows clear signs of improving. Treasurer Swan has reiterated this sentiment in respect to stimulus packages in place in Australia. He wants long-term trend growth to be at 3%.

National Accounts

I'm sure you're aware of the strong National Accounts figures released yesterday - up 0.6% after a positive 0.4% the previous quarter. The RBA will now be looking very closely at whether the economy can sustain this positive level of growth in the absence of government money being thrown at it. Crucially though, figures such as these, and the positive sentiment being generated, can have the effect of emboldening investors, businesses and consumers. All good for economic growth which will need to me managed if it picks up by raising interest rates to ensure the economy doesn't heat up too much.

Interest rate markets reacted with rates moving back up across the board after moving down Tue afternoon / Wednesday morning. Rates have been very volatile over the last week as markets attempt to work out the state of play and what it means for rates.

Yields

Yields have been quite volatile of late as traders continue to try and second guess the economy and the RBA. Consequently the yield curve have moved down about 10 to 20 points from 1 yr to 5 yrs today. Over the next two years we are looking about a 2% rise in the cash rate to 5%. The economy will in my opinion recover very slowly (unless China's growth explodes) so it will take some time to get there. If that's the case the rise in rates is already priced in with some institutions offering 2 year returns of near 6%.

RBA Monetary Policy

The RBA left cash rates unchanged yesterday. The language seemed to imply to me that there is still a little way to go, particularly internationally, before they can be confident enough to lift rates. The market also seems to have this impression as some of the wholesale rate rises of the last few days have been unwound with rates a little lower this morning.

Full text of the statement is at the below link and worth a quick look. It's very short.

http://www.rba.gov.au/MediaReleases/2009/mr-09-19.html

Credit

Figures released by the RBA yesterday show that credit to the private sector rose by 0.1% over August and 2.5% over the year. Housing is up 7.4% and personal credit up 5.6%. Business credit however dropped 0.6% over August and 2.2% over the year indicating the area most at risk during this delicate phase of recovery.

Earlier in the week retail sales showed a bounce back from last month with a jump of 0.9%. Still not enough to justify an October tightening though in my opinion. Building approvals fell by 0.1% in August.

Baltic Dry Index

The Baltic Dry Index reflects bulk international commodity shipping rates and provides advance warning of changes to commodities prices and particularly at the moment, activity in China. The BDI has been in decline since early June. This was a precursor to the fall in both the Shanghai and CRB Commodities Indexes that we have seen recently. Weakness in these two indices are a little worrisome for Australia. Perceived weakness in China has also caused the price of oil to fall below $US70 a barrel. Also note that China's key stock index dived 6.74% on Monday and 21.8% in August.

GDP Wednesday
Last week economists were forecasting 0.6% growth in real GDP for the qtr. Inventory figures released yesterday showing a record drop of 3.4% in the qtr may cause some economists to review down their forecast. A positive slant could be that demand picked up during the period causing inventories to be run down to keep up with demand rather than run down due to a perceived future weak demand.

Company profits fell a seasonally adjusted 7.8% it was also announced.