Rate cut party!

Yes, my trousers are riding high. For those that don’t know, in early December, as bold young economists predicted the end of the  rates cycle, I bet the universe that if the next move was not down, then I would run naked up a mountain. And today, as the CPI misses, the dollar swoons and the sharemarket can’t wait to join the conga line of global idiots, I’m on the sauce!

The Credit Suisse interest rate market is now pricing two full cuts in the year ahead in what is described by chartists and technicians as the “Bloxham buster”:

sg2013042442807

Our resident optimist sounds a little more shaky in today’s feel good note:

Australia’s inflation remains low, held down by the high AUD. The trimmed mean was +2.2% y-o-y in Q1 (market had +2.4%). Inflation clearly remains low enough to make the RBA comfortable with its ‘on target’ forecasts. And, as they have said recently, inflation is low enough that they have room to cut rates if demand weakens. But, at least for the moment, demand is picking up: retail sales, house prices and construction are up, as low rates are getting traction. Should these weaken, a cut could be on the cards, though this is not our central case. We maintain our non-consensus view that the easing phase is done.

Meanwhile the aptly named Kouk, who a few short weeks ago saw rate hikes all over, has gone all warm and fuzzy at BS:

To be sure, the economy is continuing to expand at a reasonable pace and the impact of past interest rate cuts are still to take their full effect. But the case for a rate cut is enhanced by the mix of an overvalued Australian dollar, global economic softness, the terms of trade slide and uninspiring levels of business confidence, fiscal contraction and now an inflation rate that could fall too far.

There are still 13 days until the Reserve Bank’s board meeting and events could come along that sway the final decision.

But armed with the most recent news on inflation, the bank looks set deliver a 25 basis point rate cut to make sure inflation this time next year isn’t too low.

One wonders where this wisdom was a few weeks ago. After all, the Kouk created the TD Securities monthly inflation gauge that has been pumping out zeros faster than the Greek economy. N’er an “I was wrong” in sight!

Bank bill futures still say September for the next cut but I’d guess sooner on current terms of trade weakness:

sg2013042443895

And the true idiot cousin of markets, stocks, is just happy to know that the chamber ain’t empty and up goes the bourse 2% with cyclicals in charge, and how!

sg2013042444691

Yey! Milky wilkies!

David Llewellyn-Smith

Comments

    • The Kouk wouldn’t know Arthur from Martha. The only constant in the Kouk’s life is his undying support for the ALP.

  1. The stock market reaction is symptomatic of the problem. It’s acting rationally given its recent training. I know your trousers appear safe, David, but really…even you, from your comments, see how out of control asset market are. Do we need to feed them more with lunatic monetary policy? I’d argue, no. Control them, now, lest they control all of us, forever….

  2. The RBA should cut by 1/2% next month. See how the aussie dollar holds up at a 2 1/2% cash rate. There is nothing stopping them. Plus it would be an interesting experiment.

      • Macroprudential tools would be great, but it’s hard to see them being introduced at the moment.

      • Macroprudential policy is already BAD! 🙂

        We NEED interest rate RISES.
        We need some sort of stop to the ‘destroy all business’ attitude now prevalent throughout the society.
        We MUST have a lower dollar.

        Current economic policy and , more importantly, economic theory is just plain BS.

        Of course none of it will happen. We’re going to get
        1. Interest rate cuts despite the inflationary hell they will let loose in a couple of years.
        2. Another Real Estate boom
        3. Furhter destruction of businesses through Industrial, WHS, Taxation, Superannuation policies
        4. Expanding CAD and an even faster sell-off of Aus assets to finance our consumption
        5. Current bureaucrats will get to retire with their multiple $100K pensions
        Current politicians will get to retire with THEIR $100K pensions

        So who gives a rats? We’re all gunna be rich! Rich i tell ya! Just lower those interest rates and she’s all good mate!

        (I know i’m getting irrational! Searches around the floor for a wine bottle with something left in it!)

        • Get ya filthy maulers of that shiraz bottle…it’s mine…But seriously. We aren’t going to get your points 1-5. The RBA is going to raise rates. I know it seems like an impossibility. But they will.

          • But why Janet? Their policy is to get another RE boom going. They have to lower rates. So I’m really interested in your reasoning. I must be missing something.

        • “We NEED interest rate RISES.”
          “We MUST have a lower dollar.”

          *Scratches befuddled noggin*

          Ok, I’m lost. How’s y’all gonna achieve that little miracle?

          • “Ok, I’m lost. How’s y’all gonna achieve that little miracle?”

            Yes I KNOW Op8…just another bloody windmill!

          • Raise the OCR by 50bp.

            Add an additional 100bp levy for owner-occupier residential mortgages

            Add another 150bp for investment property mortgages.

            Print billions, or trillions of AUD and buy any and all overseas assets that aren’t nailed down as the AUD has an unexpected (and unearned) purchasing premium given to us by the actions of foreign central banks.

            When foreign banks start seeing they are losing a gambit by giving us a premium, they’ll readjust the AUD for us.

        • What if it was possible to see into the future, say for the next 10 years. And looking 10 years ahead, you can know for certain that interest rates in other advanced economies (or the world interest rate) will remain at 0%. Would you still say raise interest rates?

          Because a 0% world rate for the next 10 years isn’t that far out of the realms of possibility in my opinion. Even if the US labor market improves and the Fed lifts rates, they are still going to be low, and the next time they have a recession, they are going straight back to 0%.

          If this is the case, then there is no “recession we had to have” logic to inflicting a recession now with higher rates. Because even if it had the affect of crushing non-tradeable inflation, lowering imports & wages, there would be no V shaped period of export & productivity led growth waiting on the other side, because other advanced economies would still be depressed, with 0% rates and all still trying to weaken their exchange rates.

          • Sorry fellows! That is with my idealistic hat on.
            Please put up with my disorganised thinking for a few minutes!

            We’re run this negative RAT rate crap since forever. Where has it got us. People have responded logically. We’ve not saved. We’ve consumed. We’re deep in private debt, and now trying to increase public debt, with the mirror image external debt which is where the real problem will arise. We’ve had to sell most of our natural assets to fund our over-consumption.

            So how do we stop over-consumption? We need to raise interest rates to limit credit creation. How do we make sure we have some capital to spend on developing our own nation be it mines or infrastructure? We need to save through higher interest rates.
            The exponentially increasing infinite debt thing has to stop. As well we can’t keep selling our assets forever. As good old Herb Stein said “If something cannot go on forever it WILL stop”
            Therefore we must raise interest rates (Op8 I know we have some unfinished business on this matter but bear with me for a moment!)
            Then comes our dilemna in modern economics. With our freely floating exchange rates increasing interest rates results in appreciation of the currency. With madmen such as Bernanke, King, Draghi, Abe et al around the world this effect is greatly multilpied. This effect would be much less if we were not prepared to just flog off assets. However that is another aspect that needs a whole separate set of argument.

            So what we should be discussing here is ‘How do we get to save more and balance our economy?’

            The first step in re-balancing has to be to get the exchange rate down. We’ve been over ii…Tobin taxes etc. Better minds than mine ought be really considering such stuff! They aren’t!

            We’re all just going round and round in this stupid unfathomable frenzy. It’s stupidity that is caused by adherence to a bunch of stupid theories originating out of the USA that presume you can consume to an unlimited extent forever and can pay for it all with bits of printed paper forever. There is no REAL cost.
            It is almost impossible to conceive of a set of policies that are worse or could bring on more economic and social destruction than those policies we now have. What we are doing doesn’t work. It’s plain to see. It’s proven!

            The quote from James Quinn from my post in ‘Links’ this morning
            “There is nothing normal about anything in our society today. If you were magically transported back to 1996 and described to someone the economic, political, financial and social landscape in 2013, they would have you committed to a mental institution and given shock therapy.”

            NOW from an ENVIRONMENTALLY SUSTAINABLE viewpoint this idiotic negative RAT rate infinite credit regime we have created results in massive over-use of the world’s resources and massive pollution of our environment.
            We are living off the wealth, health and indeed the very existence of our children.

            Now suppose we set rates and credit so that if you want to borrow to consume more you have to persuade someone else to consume less to save. We would stop this massive over-use of our world. We could allow ‘wriggle room’ for the effects of productive growth.

            Positive RAT rates would have a seriously beneficial effect on our world one form and another.

          • Sweeper…Zero rates haven’t worked…and you’re right they won’t.
            I’m not arguing that anything will be easier. Indeed reform and rebalancing to a more productive society, as i’ve said over and over,will result in severe dislocation.

            However continuing on this suicidal path cannot be the way to go. We should be trying to work out how to share the pain not trying to continue spreading the disease.

            I know it is all impossible and that’s why i say “The answers lie back in time”
            We’ll all just go on over-consuming, stealing from the prudent and rewarding the profligate….until we can’t; until there is nothing left for us in western society.

          • Hey Flawse .. mate, fwiw I agree with your observations identifying the problem/s. Reckon we only differ on possible solutions.

            “We need to raise interest rates to limit credit creation”

            As has been oft discussed, to do so brings with it all manner of (fatal) consequences, given the hole we have dug ourselves into.

            You are quite correct in saying that the answers lie back in time. Doesn’t help us find a best path forward now, though.

            For my part, I think it most important to analyse and understand HOW we (the human race) got here in the first place. Not that this will uncover a solution – I doubt there is one. More likely IMO, given a long view of past human societies, is that we should be looking to what sort of system we should insist on having to replace the present one when it (inevitably) collapses. Phoenix from the ashes, etc.

            Ban Usury (charging/offering of any “interest” on “money”).

            Problem Solved.

          • “Now suppose we set rates and credit so that if you want to borrow to consume more you have to persuade someone else to consume less to save. We would stop this massive over-use of our world. We could allow ‘wriggle room’ for the effects of productive growth.”

            But flawse, half the problem currently is that the Chinese are saving too much. Somebody has to overspend to compensate for that saving. It happens to be us, the Americans and the Europeans.

            Until the Chinese stop saving and start consuming, we’re stuck with the current situation.

          • Capitalist

            The powerful can. The SME has a lot more trouble and the pricing power of the enterprise will determine how much each party ends up paying.
            I guess the real beneficiaries once again will be our ‘financial managers’

            In the end we get nothing for nothing. If there is no real saving going on for this then it is just another crock.

    • 0.5% cut?….buy! Because if Aussie cuts, the global litmus test of survivability of the GFC, then God help the rest….buy A$ with your ears pinned back if the RBA cuts…..

          • Okay. Question: Why is the stock market buying up today on the back of possible lower interest rates? It’s not the funding issue, is it – rates are already carry-positive. It’s the fact that no offshore investor expects to lose on the exchange rate by buying now. Why else would they buy today? If the A$ was going to drop, then they’d wait until the rate drops in their favour. Offshore investors are buying now because they know that any interest rates cut will be both cashflow and exchange rate positive. That’s a higher A$….

          • The exchange rate is underwritten by our willingness to flog off our assets to foreign buyers. Thus so far lower interest rates haven’t dropped the exchange rate. However as HnH points out it may all go down by the elevator shaft not by the elevator…never mind the stairs!

          • You mean like.. ” The New Zealand Superannuation Fund has sold the bulk of 11 forestry blocks in the North Island to China National Forest Products Trading Corp for an undisclosed sum” ?

          • “The New Zealand Superannuation Fund has sold the bulk of 11 forestry blocks in the North Island to China National Forest Products Trading Corp for an undisclosed sum” ?”

            Fair bloody dinkum? Wow! You can see productivity going through the roof there from foreign investment!!!

            What a great bloody example of the damned problem!!!!!!

  3. Of course they are going to cut, they can see headwinds for the housing market looming as FHB’s stay out of the market.

    The only was that they can get them back in is to drop interest rates even more

  4. Tassie TomMEMBER

    The “heatmap” chart is interesting – a 15% chance that interest rates will be 4% or over by September 2014!

    I’d be well and truly willing to bet $100 that interst rates will be under 4% in 18 months time for a $15 win if I’m correct.

    Does anyone know how I can place a bet like that?

    • Seriously? Odd-on? You’d risk $100 bucks for $15 over 18 months…and what if Bambam had been injured this morning…or tomorrow?

  5. Great to see by your chart Financials are already up by 2.16%.
    -Really important in a productive economy!
    Gail can get a bigger bonus!!!!

  6. I wonder though if lowering interest rates are hurting the economy more than if we had higher rates. If we consider all the retires who are not getting a good rate of return on their cash in their super, then they will be less likely to spend…which only re-inforces another cut. ZIRP here we come. Mini housing boom here we come. Crash Bang there after.

    • Like added fuel to the train speeding towards the cliff

      Of course they will drop rates, especially before the election, to help the useless fools currently in charge.

    • Yep, I’ve always said a few more cycles before we hit zirp and then the pain starts. The caveat on that of course is if the incumbent government continues to find ways to cook the inflation data on the low side. That being the case there’ll be no more temporary rises to put the fear of god into the debt and consumption junkies.

      Low inflation my foot!

      • Houses and Holes says: April 24, 2013 at 1:49 pm Yeh, there is, tradable inflation. We need macroprudential policy so BAD I can taste it.

        Sorry, HnH, their arse is not riding on it. The countries is, but not these fn duffers. They are being payed to play, regardless. Do you honestly think after all your education and worldly experince, that these duffers give a rats about Australia, the real world or the world of hurt to the common man that they can engender?

        The independence of the RBA is totally correct. It is first and foremost independent of the PUBLIC.

        It is self justifying, dictates to the Treasury, at whim, involves itself in scandels (plastic money bribes) It pays its
        gov (at the time more than the US FED GOV & us president combined).

        It is starting to dictate to the NATIONAL GOVERNMENT as you have alluded to.

        A puppet governor could not the populce disrepect.

        Macroprudential controls my fn arse! An honest burglar, you demand?

        They are not coming in any way or shape that you you’ld consider either acceptable or desirable.

        • +1000.. I am also frustrated by HnH’s optimism that the RBA will do the right thing..

          A high AUD exchange rate helps the banks manage their overseas wholesale funding easier..So RBA will do everything to help the big 4 banks maintain the status quo – by cutting rates and paying lip service to managing the AUD and macroprudential regulations – i.e. do nothing to actually manage the economy in a sustainable manner.

    • Yes, because nothing says “no public appetite for debt” like private debt of nearly 160% of GDP… Sounds very contrarian to me.