So, interest rate markets are still pricing the next RBA meeting thus:
Without putting too fine a point on it, that is close to an 80% chance of another 25bps cut and a slightly above 20% chance of a hold.
To my mind this is too aggressive vis-a-vis another cut.
I still believe firmly that the next move will again be lower, as do markets which are still pricing another 100bps in the next twelve months:
But the next meeting is more doubtful. Leading off the skepticism was the RBA Governor himself, who had the following to say last week:
And to repeat, it is not our intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households. All that said, returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.
So monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly. As such, it has been responding, to the extent it prudently can, to one element of the multi-speed economy – the one where it is most relevant.
What monetary policy cannot do is make the broader pressures for structural adjustment go away. Not only are the consumption boom and the household borrowing boom not coming back, but the industry and geographical shifts in the drivers of growth cannot be much affected by monetary policy. To a large extent, they reflect changes in the world economy, which monetary policy cannot influence. Even if, as a society, we wanted to resist the implications of those changes other tools would be needed.
That is not a declaration of imminent cheap cash.
Moreover, Australia’s trade deficit has corrected more quickly than I thought it would in April with iron ore sales and a falling dollar more than offsetting falling coal revenues. There will probably be another deterioration in July when the weaker iron ore prices we are seeing now flow though to contract prices but volumes have been good and the dollar sub-parity so the damage will be limited. Moreover, the ore price and 12m swaps look to have stabilised in the low $130s, which is still damn good. So have Chinese steel prices on stimulus, such as it is:
Finally, Australian bank CDS prices have also eased from recent highs as hope creeps into markets that Europe will get some form of stabilisation measures up in time:
These are still nosebleed levels, associated with uneconomic prices for bank debt, but as the ANZ showed us last week, the pressure is not yet such they can’t pass on full RBA rate cuts.
The final point is the swing factor now. I suspect we’ll need to see further deterioration in Europe (or locally) to get another cut in July.
