Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.
Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).
Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.
Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.
Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.
Watch out Australia: There's a flood of dismal economic news on the horizon
The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.
The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.
That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.
Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.
As the ad man used to say, “but wait, there’s more”.