Those who believe (and it is just that – a belief system) that markets are efficient and cannot be moved by one man may dismiss this as just speculation. Or ignore the Twitter feed from the Federal Reserve when Chairman Bernanke speaks.
Markets have indeed been moving, with an upswing in the ASX200 – against the tide of a dip in other equity markets – combined with a broad sell-off in the Australian dollar. But more importantly, interest rates futures markets are now pricing in a cash rate below 3.5% for next year (see chart below), a substantial change from just a few weeks ago. Could all this been the work of one journo – Terry McCrann – or one treasurer – Wayne Swan?
First lets look at McCrann, renowned as the “Shadow” RBA Governor due to some prescient calls in the past, who wrote a piercing piece of prose yesterday on the possible direction for interest rates:
THERE’S been very little speculation around next week’s Reserve Bank interest rate decision.
Why should there be? Media commentators, market economists and market pricing are all-but unanimous: the RBA won’t cut. So let’s all look at May.
That is a very mistaken complacency. The chance of a rate cut next week is at least 50-50; and in my judgment is actually the more likely outcome.
The complacency would seem to flow from an over-interpretation of the March no-change decision three weeks ago, and an under-appreciation of a significant change revealed in the dynamic of board meetings.
The third factor is a lazy assumption that both RBA management and board would like to see the March quarter inflation figures at the end of April before making a rate cut decision.
Of course, the more likely scenario of the move in expectations involves more than just the never-ending speculation around interest rate cuts and spars between journalists and market economists. Although to place McCrann’s incredulism at the markets getting it wrong again in context, the most recent Bloomberg survey for interest rate directions had 16 of 26 economists expecting a 25bps rate cut in May with none expecting a rate cut in April. Indeed just over a third expected no change in cash rates for the whole of 2012, with one economist actually expecting two rate hikes in the December quarter this year (probably the resident bullhawk in the survey).
This outlook has changed considerably very recently, according to the following chart:
Within the space of a few weeks we’ve had a doubling of probability of a rate cut and a similar expected move in the magnitude of cuts expected for the rest of 2012 and into 2013 as markets start to catch up with the reality of disleveraging Australia.
Maybe McCrann’s comments were the catalyst for this move, but what markets are really reading into are the succinct profit and risk warnings from the RBA contained within its Financial Stability Review, and Treasurer Wayne Swan’s “bombshell” comments this morning, that spending cuts will be required to meet the required (by the rating’s agencies) budget surplus goal.
With no fiscal easing on the table – from either side of politics – and the receipts from FutureBoom! not meeting up to expectations, its the job of an increasingly embattled Reserve Bank to keep pulling that interest rate lever and let monetary policy and the automatic stabiliser of a floating speculative currency to carry the load.
So maybe its not quite the moment to fix your mortgage – but time to finish your online overseas Xmas shopping. The easing cycle appears fully underway as markets and officialdom wake up to the reality of a disleveraging Australia, but don’t count on any sweeteners or helping hands in the May Budget.