Bill Evans backflips

Goodness me. Hot off the press. Following May’s bullhawkian flirtation, Bill Evans of Westpac has just rocked the market with a total backflip on interest rates. He has just called 100 basis points of cuts in 2012:

The market is now pricing in a 25bp rate cut by October and 50% chance of a follow on move by February next year. The impetus has in the main been from the large trading books of offshore investors/traders who cannot envisage a tightening environment in a developed economy where rates are already in the contractionary zone, especially against a backdrop of deteriorating conditions in global financial markets and a worsening situation in Europe.

We saw similar moves to price rate cuts following deteriorating global conditions in May last year (when Greece required emergency funding), November (when Ireland was forced to seek an EU/IMF bailout) and in March following Japan’s earthquake disaster.

All proved to be temporary.

Local economists, including ourselves, and domestic traders have been surprised by current market positioning given that the Reserve Bank has held a strong medium term tightening bias. Our view has been that because of the Bank’s strong tightening bias there would be one rate hike in 2011 which would be a policy mistake and rather than signalling a sequence of hikes would be followed by a long period of steady rates extending through most of 2012.

We are now of the view that the direction of market pricing is probably correct and the next rate move in Australia will be down rather than up.

We now expect a sequence of rate cuts beginning with 25bps in December 2011 and through 2012 totalling 100bps prior to a period of steady rates in 2013. The outlook for the world economy, and difficult global financial conditions which are expected to persist for some time, indicates that rates in Australia need to move back into the expansionary zone.

While the catalyst for the first rate cut is likely to come from offshore we do not expect it to be a one off. Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and a downward adjustment is required to avert a damaging round of contraction. This rate adjustment is likely to take a similar form to previous easing cycles.

I’m not going in too hard on this. Bill has seen the tea leaves and changed his mind, like any good economist should. He actually uses the word “deleveraging” in the report.  This is a must read and leaves a major schism between Westpac and all the other banks. CBA, for instance, is still calling 100 basis points of rises. Stand by for a major shakeup.

Houses and Holes
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  1. I heard him on the radio make this same point when the consumer sentiment survery came out.

    Deleveraging was not was just ‘increased savings’

    But you are right, at least he is willing to change his tune when the evidence shows this to be the case.

    I will try to find a link from JHanuary 2011 when 21 economists were polled on likely direction and timing of rates…20 from 21 said rates would rise, but at various points in the year.

    1 economist said that rates would go down next move…guess who?

  2. WBC could be finding their clients are making heavy weather in the present market. Weak business lending, a stagnant housing market, rising delinquencies, dismal business and consumer confidence, stationary bank share prices and stalled bank earnings…..well, I reckon rate cuts would make sense too if I were in Evans shoes.

  3. During lunch I watched someone (Kiwi?) economist on ABC24 talk about consumer confidence.

    All the usual suspects were laid out – for minutes on end – but he never once talked about debt saturation or disleveraging.

    Then, the next “spot” was about the RBA releasing credit card debt numbers….

    Like I said awhile ago folks, time to lock in your term deposit rates on your super and non-super savings.

    • Prince,

      Saw the same segment – think the number was $49 billion – what a beautiful juxtaposition.

      Evans’ full article is on BS – he continues to use weasel words like “deleveraging” and “household savings” – it seems as though there is a new four-letter word that cannot be used in polite company – D E B T.


  4. So, open question, I’m no economist, but if the major banks need to borrow heavily offshore to roll over existing debt, aren’t they at the mercy of interest rates determined by their (offshore) lenders? Either that or we face some kind of credit crunch? You tell me someone.

  5. Just putting it out there. I would not be surprised to see some bad stuff (don’t want to swear here) happen offshore over the weekend and we all come into work Monday scratching our heads looking at charts with lines dropping off cliffs.

    US, EU, China. One, two, even three (not expecting anything from China btw).

    US talks fail. EU talks fail. I reckon it is more than 50/50.

  6. So begins the profit margins squeeze: the banks need to keep the property market afloat so their ratings don’t get hammered so they don’t have to pay more when replacing short/medium debt to increasingly risk-averse international lenders.

    Instead of taking “the hit they have to take” they just want the RBA to protect them from their own stupidity by being caught over-exposed to Australian property.

    Unfortunately, it will happen and those hit hardest will be the most sensible ones: savers. Now we’ll get paid less interest for leaving our deposits with increasingly risky banks.

    The fundamentals are broken from where I’m sitting.

  7. “Deleveraging was not was just ‘increased savings’”

    OMG Economists and Swanny still dont get it.

    People are NOT deleveraging and NOT increasing savings.

    THEY HAVE BEEN TAPPED DRY. Until they realize that fundamental problem, they will are useless.

    (This also feeds into the Carbon Tax debate.:) )

    People have no more to give, be it for consumer discretionary spending, Tax, or wiping their arse with the 2011 Soft Tail Sorbet.

    And now just wait until people get bent over for the 1st July price rises, like Rates 6%, electricity, gas, water. Then we’ll see some fireworks next month.

    Yes WBC are correct, finally. I forecast after the Nov rise, in Dec, that the next move was down. Now I’m no economist, but I speak to a lot of people and that Nov10 double rises, ripped the heart out of everything. Stick on top 20% gas increase in Feb11, a 35% water increase in Mar11, Power increases, petrol at $1.50/l etc, etc, etc, and it can ONLY get worse.

    • Where’s that edit button
      “THEY HAVE BEEN TAPPED DRY. Until they realize that fundamental problem, they are all useless.”

    • Agreed.

      I’ve been calling “next move down” for about 6 months now, and was wrong on the last hike (which I still think was rushed, given bad data that came out soon after).

      And, yeah, as you said, the quick succession of hikes straight after the rises ripped the heart out of people.

      Crikeys…you should even see the spikes in property listings soon after the hikes (eg. at – disclosure: that’s my own site)

      /self promotion!

      • so blowing one’s trumpet are we …
        might have to get you a gig in my industry ??
        ps. locked in a lot of TD’s last week.

  8. Now it’s the time for the RBA to prove if they are really committed to fighting inflation.

    • mb, I stress the point, the RBA mantra of being forward looking 12-18 months, and all the other rhetoric is just crap.
      The RBA set rates based on IF a greater % of people can pay higher rates and it doesnt effect the housing market, to protect the banks. The signs are in. Consumers are tapped dry, and this is effecting retail spending, and peoples ability to take on credit (except C/C as people are using this to pay for COL increases) . The RAB WILL drop rates, because the next GDP Q2/11 will be negative and Australia will be its first tech recession in 20 years. Since Westpac have come out, its in the banks best interest the RBA drop rates, if they pass this on, is a different story. I also argue all of Australia’s inflation issues are Cost-push inflation, meaning everyday people are not contributing to Australia inflation issues. (Blame the US, blame Govt (local, State, Fed) spending)

      • Inflation and debt are structurally too high in Australia. A period of economic softness and soft house prices is good for the country. The RBA should NOT cut at the first sign of weakness. It would be good for Australia to have a long period of stable rates and rate expectations, and where they are now it’s about right I think.

        • For me, mb, you’ve missed the point. This isn’t the first sign of weakness for the RBA to drop rates. This first sign for me was after the Nov rise, second sign has been retail, 3rd sign (I could go on) If the RBA wait much longer the last sign they are going to see is the ‘Road Closed’ just before going off the cliff.

          For me, I dont care if they raise or drop, or whatever. (I structured myself in Dec10 for this inevitable situation) I’m talking from what I see, from people I talk to and things i’ve read. Not what I see on MSM and TV.

          • Economic data has not being that bad so far this year. Weaker credit growth, compared to the crazy growth rates in the last decade, is healthy. And so are softening house prices. Cutting rates to promote more debt is the last thing Australia needs right now IMO.

      • Recession in Q2? That is hardly likely. Household incomes have been growing even if spending has not been growing as fast. Employment has been growing though not at the rate seem in H2 2010. Construction is soft and business lending has not recovered but engineering and export incomes have been strong. Just as Q1 weather-related disasters caused a notable negative GDP shock, rebuilding and recovery will bring the accounts back into positive territory.

        From a statistical point of view, there is nil chance that Q2 will show a contraction.

        But just the same, household behaviour has changed. Prudence and Frugality are this season’s guests. But that doesn’t mean they will become permanent lodgers.

        • It’s going to be interesting to see if Q1 and Q2 combined are negative on a 6 month term. I do not expect Q2 alone to be negative due to the rebound in exports.

  9. Rates might drop 0.25%. Iron ore and coal exports are getting up again close to record volumes. Inflation out July will give clearer picture.

    Don’t bet too much on big rate cuts.

    PS Steve keen sold his house in surrey hills at the worst possible time. After the gfc, surry hills was the one of the best performing suburbs up over 50%yoy. Steve keen only undferstands a text book, not real world

  10. I for one whole heartedly respect Bill’s view on at least maintaining his intellect integrity of not arguing with the data unlike the Bullhawk camp….wait till AC gets his hand on this and tries to construe up another conspiracy theory.

    On a more serious note talks of 100bps cut being proposed tells us how badly this nation needs HOUSING FINANCE CHURN (copyright @ DE) for carrying about its daily business….retailers, construction, confidence….EQUITY MATE indeed!

  11. Lighter Fluid

    With the spate of articles like this coming out in the media, it appears that Macrobaiting is in full force…

    I’m beginning to feel awkward being part of the majority again…

  12. Everytime bill evans makes a call, I look the opposite way. The majority of the time he is an uber contrarians dream!!!!

  13. This may have been mentioned already. I can’t view comments on mobile. Christopher Joye said on twitter ‘anyone calling a rate cut is a bloody nancy’

    • +1 . I tried accessing via iPad, and cant view comments. There was a ‘Mobile Device’ On button down the bottom but couldnt turn off. 🙁

      • Same for me with both comments and switching off mobile. It was working a few days ago. Someone (webmaster?) at MB want to check it out? Maybe a broken update to the WP Touch plugin?

  14. The property spruikers will be salivating like a rabid dog with all the ethics of one.

  15. I think we all need a bex and a good lie down.

    Anyone would think that last year the RBA had cranked rates like a Dutchman pumping water over a dyke after a big storm.

    They are only 4.75%!

    Sure retail at the moment is not justifying the credit boom valuations of private equity shiny suits but employment is still below 5%.

    5 – 5.5% would be more firmly in the Neutral Zone but as everyone seems to be getting freaked out by an impending attack of repo Romulans, leaving them at 4.75% for an extended period is now probably reasonable.

    The property market melting at 4.75% accompanied by air raid sirens and four real estate agents on black shetland ponies is probably the best confirmation of just what a cracking investment real estate has been for the last 5 years.

    Ave a good one!

  16. I see that the MSM is all over this today, the best being channel 9 this morning saying that there would be a 1% drop by the end of the year.

    I think that Westpac is doing it’s best to drum up some new loan business.

    Not that they will pass it on even if the RBA does drop rates I think that their wholesale funding cost will prevent them from doing so

  17. I’d be surprised if RBA drops rates this year. If they do, they will be a laughing-stock and completely lose their public credibility. Most likely they will stay put until the unemployment rate goes up in a significant way or China blows up. We have to remember that it’s China that exports its inflation to countries like Australia and until they get on top of it we will have higher costs of input, food and energy.

    Lowering rates now would only achieve a revival of the housing market and result in racking up more debt by the reckless public. I think that now is the time to face the debt hangover even if the economy stays in the reverse for a while.

    • >I’d be surprised if RBA drops rates this >year. If they do, they will be a laughing->stock and completely lose their public >credibility.

      Personally, I’d replace that statement with:

      I’d be surprised if RBA drops rates this year. If they do, Labor and Swanny will be a laughing-stock and completely lose their public credibility.

  18. See, this is what I keep banging on about re monetary policy versus fiscal policy.

    The domestic economy except the mining sector is clearly showing a weakening trend. The RBA may well end up cutting rates to try and stimulate growth. But could this lead to a resurgence in the housing bubble by making mortgage debt cheaper, even as large employment sectors like retail do little more than tread water? I guess it’s possible.

    So if monetary policy is such an imprecise tool, why don’t we employ fiscal policy – something which can be much more specifically targetted. If individual areas need assistance, this can be achieved via fiscal policy, without lowering interest rates, since their effect is much broader and a lot less certain.

    That monetary policy should do everything and fiscal policy should be avoided at all costs except in the case of an emergency, is really only ideological position after all.

    • Welcome to the “weighted average 1-speed economy”…….though I’m well aware you’ve known this for a long time too, Lefty.

  19. Evans pointed to the change in foreign portfolio holdings, which really needs to be thought about more deeply. In the good old days, portfolio capital was technically defined as “hot money”, the idea being that it is capital that could depart as quickly as at arrived, like gatecrashers at your daughter’s 18th birthday party.

    Well, there is a very good chance that the flows we are seeing are just that – hot money, parked in Australia until the storms in the US and Europe have passed. In fact, I think a great deal of the money going into commodities and their proxies – futures and commodity currencies especially – is being tucked away just in case the worst does happen.

    And let’s face it, the worst is already starting to happen. If S&P are to be taken at their word the US will be downgraded sometime before 2 August – that is, before default occurs. As well, the agencies have said they want to see a large-scale, long-term, credible fiscal package passed. This is a working definition of what the Congress and The President cannot agree on. So there is has to be a very high chance that the US will be downgraded even if it does not default.

    In this context, much as we might like to think they herald rate cuts, I don’t think we can pay too much attention to temporary portfolio flows into AUD assets.

    If the US is downgraded sometime in the next few days – and this would have to be a very good thing if it prevented an actual default by the Treasury – then there will be turmoil in global debt markets. We could well see vast floods of cash looking for a home here or we could see the plug pulled on our debt lake! Who knows!

  20. For what little it is worth it has been my position for an Interest Rate cut by the end of the year since January.

    If that makes me a Nancy, then so be it. All the inflation is supply side, outside the mining sector no one is spending and despite a better economy than the US, our private sector is still deleveraging as well. This is most identifiable in our Household Savings Ratio.

  21. Lefty
    I’m inclined to agree with you. There is something seriosly wrong with a system that is now calling for lower interest rates when REAL AFTER_TAX interst rates are already way negative.
    Unfortunately i cannot see any sign that the wouldbe lever=masters of fiscal policy have done anything smart in the last 50 years. The GST is one exception i guess.