20
Feb
2012

>Silly Judgement versus The Facts

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This article popped up on The Australian’s web page a short while ago http://tiny.cc/iovou .  It contains a lot of comment that is really silly and amazingly ignores what the market has done today. 
At the time of writing (around 12.45pm, Monday 20 February), the ASX200 is on a surge, up a touch over 1.1% so far for the day, the Australian dollar has rocketed to 1.0785, 0.8% higher than Friday and bond market yields are up a few ticks with the odds of further interest rate cuts a small fraction less likely than on Friday.
In any language, it is a very positive assessment of Australia today from stock investors  (ASX up); global investors (Australian dollar up) and the bond market move is in lock-step with US bond market trends.
While it is simplistic to say a one day move is a strong vote of confidence in the future of the Australian economy, it hardly smacks of “risks to the economy” from political ructions and the moves build on some longer run trends.
The story on the Australian’s web site begins:
  • Peter Anderson, the chief executive of the Australian Chamber of Commerce and Industry (ACCI), said today that speculation that Foreign Minister Kevin Rudd may soon challenge Gillard for the country’s top job posed risks for economic management. 

”This needs to be resolved soon. There are risks to the economy especially when there is instability within the governing party,” he told ABC radio.”

This is an odd assessment given how markets have moved today.  If there were “risks to the economy”, it would be safe to think that stocks and the Australian dollar would fall, not rise.  Mr Anderson may have missed looking at market trends when making this comment.
The article then quoted Bell Potter’s Managing Director Charlie Aitken suggesting there was a growing sense among foreign investors that the mining boom wasn’t being handled well by policy makers.
Mr Aitken is quoted:
  • “They believe that politicians, Treasury and elements in the Reserve Bank of Australia (RBA) are nonchalant about the ramifications of the structural adjustments taking place within the economy,” he said in a market note.  

The article went on:
  • “Mr Aitken said foreign investors believe Australia is generating its own self-inflicted economic wounds with a misguided policy response to structural change.”

Charlie, Charlie, Charlie.  Foreign investors?  Misguided policy? Self inflicted wounds?
Who says?  You?  Anyone else?  Any facts?
I’ll present a few facts.  Foreign investors are voting with their wallets, driving the Australian dollar to record highs in recent weeks with another jump of almost 1 cent today in the first reaction to the latest bout of leadership turmoil and economic risk.  What’s more, foreign holdings of Government bonds are currently in excess of 75% – a record high as investors flock to the three fold Triple-A rating of the Australian economy.  RBA Assistant Governor noted that demand for Australia is so hot at the moment, that the Australian dollar is disengaging from the terms of trade which have fallen in recent months.  
Looks like foreign investors and others are rightly ignoring Mr Aitken’s prognostications.
I suspect something else – Charlie is peddling mischief.
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19
Feb
2012

>China Eases Policy – Bad News for Australia

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Over the weekend, China reduced its Reserve Requirement Ratio by 50 basis points to 18.5%. 
This is unambiguously bad news for Australia as it reflects Chinese economic softness which the authorities are working to arrest and then hopefully reverse with the policy easing.
The easing in China comes hard on the heels of recent policy easings in the US, Eurozone, UK, Canada, Japan, Brazil and a host of other counties as they deal with a growth slowdown and on-going low inflation.
China’s economic momentum is a vital determinant of the performance of the Australian economy.  A quarter of Australia’s exports end up in China, the prices paid by the Chinese for many resources is still high (although falling from recent peak levels) and the investment boom in Australia owes a lot to the Chinese and private sector partners developing the necessary structure to pump out raw material exports over the next few decades.
If the Chinese economy is strong, the Australian economy gets a bit of a free ride.  Conversely, if China is slowing, there could be headwinds for us.
Economics 101 tells us that policy makers only easy policy if response to weaker growth prospects and low inflation.  They tighten policy when the economy is strengthening.  Which makes the easing in China over the weekend a little disconcerting because it is being delivered due to Chinese economic softening.  GDP growth has eased a few percentage points through 2011, export growth is weak, the property market also has some characteristics of a busting bubble and inflation is on a clear downtrend, even with the unusual blip in January.
It’s a scenario that should be more worrying than comforting and it is one of the global issues that leaves the door open for interest rate cuts from the RBA in the months ahead.

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19
Feb
2012

China Eases Policy – Bad News for Australia

Over the weekend, China reduced its Reserve Requirement Ratio by 50 basis points to 18.5%.

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16
Feb
2012

Qantas – A freckle on your face

Qantas is about the 48th largest company listed on the Australian stock exchange. It has a market capitalisation of around $3.7 billion making it smaller and less significant than the likes of Resmed, Sonic Health Care and Worley Parsons.

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16
Feb
2012

>2012 kicks off on a solid note

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2011 ended with falling employment, falling house prices, a retail recession, a decade low underlying inflation rate, housing credit at a 34 year low, the global economy looking at a BRIC wall, a massive fiscal tightening and sentiment measures at levels more or less consistent with recession.  The Government was fearing that their precious surplus in 2012-13 would be swept away as economic growth undershot the MYEFO projections.

In the first 7 or so weeks of 2012, many of these indicators look like they have stopped falling, or even better, have rebounded spectacularly.

What could account for this turn?

It would be silly to link the RBA rate cuts of November and December to much of this, other than perhaps sentiment.  Maybe the interpretation of the numbers in late 2011 was overcooked – that is, the house price falls were not only manageable but are good news; or the jobs numbers were distorted by statistical noise or some other unknown factor.  Maybe there was too gloomy a view of the global situation and a lack of appreciation of the success global policy makers are having in putting a floor under the parlous position of many governments, banks and economies.  The low inflation result locally could be boosting the purchasing power of consumers, because after all wages growth is still rolling along at a 3.5 to 4% pace.  The money being saved on cheap bananas and electronic goods is being spent elsewhere?

It’s not clear.  But let’s take the better news at face value and now try to assess whether it can be sustained.

There obviously remains a medium term downside risk to Australia as the ever appreciating Australian dollar clips growth at a time when monetary policy is only neutral and fiscal policy remains as tight as a fish’s bum.

I wrote a while back that households were about to get a bit of a cash boost -http://stephenkoukoulas.blogspot.com.au/2012/01/household-incomes-about-to-get-boost.html – which may have an influence a little down the track.  And while the RBA will “look through” the 0.25% impact of the carbon price on underlying inflation, “looking through” might mean different things to different people, if you get the drift.

I won’t be convinced that things are find and dandy until there are material improvements in global conditions, Australia sees GDP growth above 3% for at least two straight quarters and we get trend employment growth to 15,000 a month or so.  That is, at best, still 6 months away.
  

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16
Feb
2012

A nice rebound in employment – Treasury & RBA nail it

The January labour force release was a rip-snorter – employment up 46,300, the participation rate up 0.1% to 65.3% and the unemployment rate down from 5.2% to 5.1%.

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14
Feb
2012

A 10bp cut in March?

About 8 or 9 years ago, when I was Chief Markets Strategist at TD Securities in Sydney, I wrote a paper outlining the problems the RBA had in moving official interest rates in increments of 25 basis points.

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14
Feb
2012

RBA Supports Ongoing Increase in Gross Government Debt

At the Bloomberg function in Sydney this morning, I had the opportunity to ask RBA Assistant Governor, Guy Debelle, about liquidity in the Commonwealth Government bond market. This is a critical issue for Australian market stability.

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12
Feb
2012

50,000+ new jobs in January?

The January labour force data will be released this Thursday and as always, it will move markets and influence the monetary policy deliberations of the RBA.

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12
Feb
2012

>And another thing on the RBA and bank margins…

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Can we stop the feigned concern or sensational grandstanding about the banks taking over monetary policy from the RBA?  Please?
The decision of some banks to lift their standard variable mortgage rates a few ticks is an event that will be taken into account by the RBA when it considers official interest rate settings each month in much the same way as it has over the past 15 years when the gap between the official cash rate and the standard variable mortgage rate has been between 170 and more than 350 basis points.
6, 7, 8, 9 or even 10 basis points that the banks have tweaked their lending rates in recent days is well within the ability of the RBA to deal with.
To be sure: the banks’ moves on mortgage and small business rates and the cost of funds will be a factor in future RBA deliberations.  So too will the prices that are charged for new cars, computers, tomatoes, underpants, haircuts, petrol and dog food.  So too will the currently unknown inflation and unemployment data for February, March and April.  So too with the level of the Australian dollar, credit market problems in Europe, GDP growth in China, fiscal policy, consumer sentiment and the weather.
At least the RBA can see what the banks are doing.
If next month or the month after that or the month after that, the RBA finds that it needs to adjust rates a little or a lot, up or down or leave them steady… guess what?  It will.
Bank interest rates are one issue and one issue only.  If what the banks are doing occurs when the RBA sees more influential information on wages, productivity, retail spending, the CPI, commodity prices and stock price moves, guess what?  It will adjust the cash rate to ensure the economy stays on an even keel with inflation always targeted to be within 2 and 3%.
What the banks are doing is no big deal.


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