This is the main driver for a cash rate CUT, and it'll happen soon

Wed, 13 Feb 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 

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This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.

While the RBA is yet to act on this fresh news, with official interest rates having been held steady at 1.5 per cent for the past two and a half years, the change in financial market pricing has seen the Australian dollar fall and the stock market register strong gains.

This is how it should be.

A large part of the interest rate cut scenario and how it would work to improve the Australian economy is via a lower Australian dollar exchange rate. While changes the Aussie dollar are driven by a lot more than interest rates, they can have a sizable impact on investors flows at least in the short term. The lower dollar, if sustained, will work to boost the competitiveness of exporters and those local firms competing with importers. As such, the contribution to bottom line GDP and jobs will be helped in a lower interest rate environment by stronger external trade.

The rise in the stock market is good news for investors as it is providing a partial offset to the slump in wealth coming from the decline in house prices. It could also be reflecting the market’s confidence of rising profits, an improved cash flow and a lift in private sector business investment that will flow if the RBA cuts interest rates.

Any interest rate cut from the RBA would also help the cash flow of all borrowers, be they in the business sector or householders. This cash would either be used to pay down debt or boost spending, both of which help the profitability of the business sector.

The timing of interest rate cuts remains unclear. After all, the RBA which has for the past year stubbornly expected interest rates to rise, has only just started to soften its view.

Recent comments from RBA Governor Philip Lowe suggested that the health of the labour market and changes in the unemployment rate, in particular, will determine any change in interest rates.

On that score, the unemployment rate has been trending lower in recent times, although it remains well above the level prevailing around much of the industrialised world and indeed, at the level prevailing before the global financial crisis hit.
Suffice to say once the weakness in the economy start to drive the unemployment rate higher, the RBA will lower interest rates. In the mean time, the adjustment has already begun with the Aussie dollar weaker and the stock market stronger as the market starts to factor in lower interest rates, at some stage, through the course of 2019.

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Change of view on interest rates

Fri, 24 May 2019

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

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html

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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.

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As the ad man used to say, “but wait, there’s more”.